Thursday, January 12, 2017

Canadian Western Bank - 25 Years of Dividend Growth

When asked which Canadian bank has the longest record of annual dividend growth, few investors would answer Canadian Western Bank (“CWB”). However, the relatively small Edmonton based bank, CWB has an impressive 25 year dividend growth streak that is the third longest on the Canadian Dividend All-Star list.

Company Overview

CWB provides various personal and business banking services through its 42 branches located in Canada’s four western provinces. The bank specializes in mid-market commercial banking, real estate and construction financing, equipment financing and leasing, and energy lending. CWB was active making two acquisitions in the wealth management sector in 2016 along with acquiring the loan portfolio and related business assets of GE Capital’s Canadian franchise financing business.

Dividends

After announcing a 4.5% dividend increase in August 2016, the company's dividend yield is currently ~3.0%. The earnings payout ratio is moderate at 44% of the trailing 12-months EPS.  The 3, 5, and 10 year dividend growth rates are impressive at 8.4%, 10.5%, and 13.0% respectively.
% annual average growth planned through 2021
Valuation

CWB's share price was pretty consistent around $30 in recent months leading to a trailing P/E of 14X. This value is toward the higher end of the average P/E of 10-15X range for the past 5 years. Looking at Price/Book Value provides a different perspective with the company’s current 1.3X multiple being on the lower end of the average range of 1.1X to 2.0X over the past 5-years.  

Qualitative Catalysts

There are some obvious reasons why you would consider adding CWB to your investment portfolio.

1. The Dividend Streak Covering Multiple Business Cycles
- Despite a meltdown in oil prices that severely impacted their home province of Alberta in 2014, a global financial crisis in 2009, and multiple troughs in the business cycle, CWB has proven their resilience by raising their dividend for 25 straight years. Despite not having the size of Canada’s five big banks (~$25B of assets vs $501B of CIBC <- the smallest of the big five), CWB seems more committed to rewarding their long-term investors via regular dividend increases.
2. Effective Credit Management Policies
- The two biggest surprises to me while reviewing financial metrics for CWB were that only 1% of its total loans related to oil and gas production, and that non-performing loans were only 0.5% of total loans over the past 12-months.  These two metrics taken together show me that the bank has effective credit management policies that have led to a diversified loan portfolio. 
3. Growing Geographical Diversification
- With its roots in Western Canada, I assumed that the majority of company's loans would be related to Alberta. However, I underestimated the growing geographical diversification the company has successfully undertaken in recent years. Although Alberta represents 36% of total loans, British Columbia also accounts for 36%, while Saskatchewan at 6%, Manitoba at 3% and Ontario and other provinces at 19% further demonstrate CWB’s growing geographical footprint.

Qualitative Drawbacks

Although there are multiple reasons to consider investing in CWB, there are drawbacks to consider as well. 

1. Slowing Dividend Growth
- Although CWB’s management does not specifically issue guidance regarding dividend growth, historically the dividend is raised by a penny each year, meaning the dividend growth percentages will decrease if the penny trend continues. Also of note is that the bank targets  a 30% payout dividend payout ratio. The fact that the payout ratio has currently grown to 44% will limit management’s ability to further grow the dividend in the short-term.  
2. High Reliance on Alberta & British Columbia to Drive Earnings Growth
With 72% of CWB’s loans associated with Alberta and BC, the bank relies on these two provinces to fuel future earnings growth. The profitability of business and mortgage loans in Alberta are somewhat dependent on the energy sector’s rebound. Although BC’s economy is more robust than that of its eastern neighbor, the sustained strength in the province’s housing market would help CWB realize profitable and growing mortgage loans in BC.
3. Earnings Volatility Given Relative Small Size of Bank
One of the reasons why investors of all stripes are attracted to Canada’s big five banks is the stability of their earnings. Their massive operations, exposure to different countries, and conservative lending practices have led to relative stable earnings growth. In contrast, the smaller scope of operations and less geographically diversified lending of CWB have led to more earnings volatility that will likely continue in the future.  
  
Conclusions

Most Canadian dividend growth investors have at least one bank in their investment portfolio. Although Canadian Western Bank is an attractive candidate to add to a portfolio given their  25 year streak of raising their dividend and resilience throughout business and economic cycles, I would caution that there will likely be a better time to add the company to your holdings. In order to provide an adequate margin of safety to an investor due to slowing dividend growth and more volatile earnings than its peers, it is worth waiting for a better entry point (P/E ~ 10-12X) before acquiring shares. 


Would you consider adding shares of Canadian Western Bank to your portfolio?

5 comments:

  1. Banks are typically a pretty safe bet in the long run. They rarely will go under and provide nice dividends too.

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    1. Couldn't agree more Buy, Hold Long! I own six Canadian banks, but wouldn't buy into CWB at current prices.

      Thanks for stopping by!

      Delete
  2. This is a very safe bet right now. It's fairly valued, has strong fundamentals, and it's a safe bank holding. Not a bad bet at all.

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    1. Agree with CWB being fairly valued, but respectfully disagree it's a safe bet. Slowing dividend growth, high western Canada concentration, and volatile earnings lead me to seek a greater margin of safety given the current price.

      I appreciate your thoughtful comment.

      Delete
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