Dividend Kings In Focus: Commerce Bancshares

Updated on September 7th, 2023 by Nate Parsh

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

More specifically, each Dividend King has increased its dividend for a remarkable 50 consecutive years. You can see the full list of all 50 Dividend Kings here.

We have created a full downloadable list of all Dividend Kings, along with 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:

Commerce Bancshares (CBSH) is one example of a slow-and-steady Dividend King. With that said, the company flies under the radar of many dividend growth investors because it has a current market capitalization of just under $6 billion.

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

Business Overview

Commerce Bancshares has an easy-to-understand business model. The company 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:

• Colorado
• Missouri
• Kansas
• Illinois
• Oklahoma

Commerce Bancshares reported its second-quarter earnings results on July 19th. The company generated revenues of $403 million during the quarter, which was up 7.6% from the previous year’s quarter. At the end of the quarter, Commerce Bancshares’ loan portfolio totaled $16.7 billion, while deposits stood at $25.9 billion.

Loans were up 1.6% sequentially and higher by 6.4% on a year-over-year  basis to $15.7 billion. Commerce Bancshares’ provisions for loan losses decreased during the quarter.

Commerce Bancshares generated earnings-per-share of $1.02 during the second quarter, which was up 11% compared to the previous year’s quarter. This increase was driven primarily by revenue growth during the period. The company is expected to see a modest decline for earnings-per-share in 2023.

Growth Prospects

Commerce Bancshares has a solid if unspectacular growth track record. Since 2008, the bank increased its earnings-per-share by 7% per year.

Looking ahead, Commerce Bancshares’ growth prospects have not changed by 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 is likely to 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, which 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 18.8%. This is quite attractive versus the ROEs that many of its peers achieve.

Commerce Bancshares’ capitalization is healthy as well, with the company having a tier 1 leverage ratio of 14.8%. Commerce Bancshares’ credit quality is strong, as net charge-offs are at a below-average level 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:

• 2006 adjusted earnings-per-share: $1.72
• 2007 adjusted earnings-per-share: $1.65
• 2008 adjusted earnings-per-share: $1.52
• 2009 adjusted earnings-per-share: $1.33
• 2010 adjusted earnings-per-share: $1.71
• 2011 adjusted earnings-per-share: $2.00

Commerce Bancshares’ adjusted earnings-per-share declined by 19.4% peak-to-trough during the worst of the Great Recession during a time period 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 2.3% dividend yield. Commerce Bancshares has raised its dividend for 54 consecutive years.

The second-most predictable source of returns is earnings-per-share growth. We expect 5% annual earnings growth over full economic cycles.

Lastly, future returns are determined in part by changes in the valuation multiple. Commerce Bancshares is expected to earn $3.80 of earnings-per-share in 2023. This means that the stock is trading at a price-to-earnings ratio of 12.6. 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 1.0% annually if the company’s valuation were to contract from 12.6 times earnings to 12 over the next five years.

Therefore, total returns would consist of the following:

• 5% earnings growth
• 2.3% dividend yield
• -1.0% multiple reversion

Commerce Bancshares are expected to provide a total return of 6.1% annually through 2027. Because of this high valuation, the bank earns a hold 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: