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Dividend Kings In Focus: Commerce Bancshares


Updated on Ocotber 21th, 2024 by Felix Martinez

The Dividend Kings are an exclusive group of dividend stocks that satisfy our most stringent criteria for dividend history.

Specifically, each Dividend King has increased its dividend for 50 consecutive years. You can see the full list of all 53 Dividend Kings here.

We have created a full downloadable list of all Dividend Kings and important financial metrics such as price-to-earnings ratios and dividend yields. You can download your copy of the Dividend Kings list by clicking on the link below:

 

Click here to instantly download your free spreadsheet of all Dividend Kings now, along with important investing metrics.

Commerce Bancshares (CBSH) is one example of a slow-and-steady Dividend King. However, the company flies under the radar of many dividend growth investors because its current market capitalization is just under $7.9 billion.

This article will examine Commerce Banchshares’ investment appeal by considering its business model, growth prospects, and expected returns.

Business Overview

Commerce Bancshares’s business model is easy to understand. It is a bank holding company whose principal subsidiary is Commerce Bank.

Source: Investor Presentation 

Commerce Bank offers general baking services to both retail and business customers, with offers ranging from retail and corporate banking to asset management and investment banking. Commerce Bank was founded in 1865 and operates branches in the following states:

The company reported earnings per share (EPS) of $1.07 for the third quarter ending September 30, 2024, unchanged from the second quarter but up from $0.92 in the same period last year. Net income for the quarter totaled $138 million, an increase from $120.6 million in Q3 2023, though slightly below the $139.6 million posted in the previous quarter. For the first nine months of 2024, EPS rose to $3.00 from $2.80 during the same period in 2023, with net income reaching $390.2 million.

The company highlighted its stable performance, including a slight improvement in net interest margin, which expanded by four basis points, excluding the inflation impact on treasury bonds. Trust fees were a significant contributor to non-interest income, growing 11.1% year-over-year. Average deposits saw modest growth, while the cost of interest-bearing deposits remained relatively flat, increasing by just one basis point. Credit quality remained strong, with non-accrual loans stable at 0.11% of total loans, and the company’s tangible common equity ratio improved to 10.47%.

Commerce Bancshares also reported key financial metrics, such as net interest income of $262.4 million and non-interest income of $159 million. The bank’s total assets grew to $31.5 billion, a 3% increase from the prior quarter. Average loan balances decreased slightly by 0.9%, while available-for-sale debt securities and unrealized losses on these securities both declined. Commerce Bancshares operates a regional network of branches and commercial offices across the Midwest and beyond, offering services like payment solutions, investment management, and wealth offices in various locations across the U.S.

Growth Prospects

Commerce Bancshares has a solid, if unspectacular, growth track record. Since 2008, the bank increased its earnings-per-share by 6% per year.

Commerce Bancshares’ growth prospects have not changed much over the last decade. The bank’s growth continues to be dependent on many factors.

First, the net interest margin represents the spread between the interest rates it pays on its deposits and the interest rates it earns on its loans. The rise in interest rates has generally been a positive tailwind for the nation’s banks, as their net interest margin has expand.

Loan growth is another way to grow revenue. The company has steadily grown its loan portfolio in the past five years.

Source: Investor Presentation 

Overall, we believe the company will likely nearly replicate its historical growth moving forward, though we have lowered our forecast for earnings-per-share growth to 5% from 6% for the next half-decade.

Competitive Advantages & Recession Performance

Commerce Bancshares is a well-run bank that provides a meaningful competitive advantage. The company has strong fundamentals. This includes an above-average return on equity, which was 14% before the pandemic. In the most recent quarter, the ROE was 16.5%. This is quite attractive versus the ROEs that many of its peers achieve.

Commerce Bancshares’ capitalization is also healthy, with a tier 1 leverage ratio of 14.8%. The company’s credit quality is strong, as net charge-offs are below average compared to most peers.

Commerce Bancshares performed exceptionally well during the last recession compared to its peers in the lending industry. The company’s earnings trajectory during the 2007 to 2009 financial crisis is shown below:

Commerce Bancshares’ adjusted earnings-per-share declined by 19.4% peak-to-trough during the worst of the Great Recession, a time when many larger lenders executed recapitalization programs that were devastating to continuing shareholders.

Perhaps more importantly, Commerce Bancshares continued its multi-decade streak of consecutive dividend increases. This compares favorably to so many financial institutions that were forced to cut their dividends during this period. Because of this, we believe the company will perform very well during any future economic downturns.

Valuation & Expected Returns

As with all common equities, Commerce Bancshares future returns can be estimated by looking at each of the three contributors to returns: dividends, earnings growth, and valuation changes.

Dividend payments are the most predictable contributor to total returns. Commerce Bancshares stock currently has a 1.8% dividend yield. Commerce Bancshares has raised its dividend for 54 consecutive years.

Earnings-per-share growth is the second-most predictable source of returns. Over full economic cycles, we expect 5% annual earnings growth.

Lastly, future returns are determined in part by changes in the valuation multiple. Commerce Bancshares is expected to earn $4.00 of earnings-per-share in 2024. This means that the stock is trading at a price-to-earnings ratio of 15.3. The longer-term median earnings multiple is in the mid-teens, but we believe that shares would be fairly valued at a price to earnings multiple of 12.

This would reduce the company’s returns by 5% annually if the company’s valuation were to contract from 15.3 times earnings to 12 over the next five years.

Therefore, total returns would consist of the following:

Commerce Bancshares are expected to provide a total return of 1.8% annually through 2028. Because of this high valuation, the bank earns a sell recommendation from Sure Dividend at this time.

Final Thoughts

Commerce Bancshares has a dividend history that few companies in the financial services industry can match. Unfortunately, the company’s valuation is even richer than its dividend history. We suspect that valuation contraction will be a negative contributor to Commerce Bancshares’ future returns.

The stock has a valuation that is slightly higher than our target, but the bank is expected to produce solid earnings growth. Commerce Bancshares also has a long history of dividend growth, but we encourage investors to wait for a better entry point before purchasing this Dividend King.

Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:

Thanks for reading this article. Please send any feedback, corrections, or questions to support@suredividend.com.



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