Commerce Bancshares: Black Friday Winner

NEW YORK ( TheStreet) -- Commerce Bancshares ( CBSH) was bank stock winner on Friday, with shares rising 3% to close at $39.20.

The broad indexes all gains of over 1% during an abbreviated Black Friday trading session. The U.S. economy calendar was empty.

On Thursday, when U.S. markets were closed for the Thanksgiving holiday, the HSBC Flash China Manufacturing Purchasing Managers' Index came in with a November reading of 50.4, which was the highest level for the PMI in 13 months. It was also the first time in 13 months that the PMI level was above 50, which indicates manufacturing expansion. The PMI rose from 49.5 in October.

Hongbin Qu -- HSBC's chief economist for China and co-head of Asian economic research for the firm -- said the flash PMI reading for China "confirms that the economic recovery continues to gain momentum towards the year end. However, it is still the early stage of recovery and global economic growth remains fragile. This calls for a continuation of policy easing to strengthen the recovery."

The KBW Bank Index ( I:BKX) rose 2% to close at 49.17, with all 24 index components showing gains for the session.

Commerce Bancshares of Kansas City, Mo., has now seen its stock return 5% year-to-date, following a 3% return in 2011, which was a strong performance, considering that the KBW Bank Index dropped 15% last year.

The shares trade for a 1.5 times their reported Sept. 30 book value of $25.47, and for 13 times the consensus 2013 earnings estimate of $2.97 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $3.07.

Based on a quarterly payout of 23 cents, the shares have a dividend yield of 2.35%.

Commerce has been one of the strongest and most consistent earners among the components of the KBW Bank Index, with operating returns on average assets ranging between 1.20% and 1.38% over the past five quarters, and returns on equity ranging between 11.49% and 12.73%, according to Thomson Reuters Bank Insight.

While several components of the KBW Bank Index have seen higher returns on equity during that period, Commerce is very strong capitalized, with a tangible common equity ratio of 10.49% as of Sept. 30, exceeded only by Peoples United Financial ( PBCT), among the 24 index components.

Commerce reported third-quarter earnings of $66 million, or 75 cents a share, declining from $70.7 million, or 80 cents a share, in the second quarter, but increasing from $65.4 million, or 72 cents a share, during the third quarter of 2011. The year-over-year earnings improvement reflected a decline in credit expenses.

The sequential earnings decline reflected a decline in net interest income to $153.8 million in the third quarter from $165.1 million in the second quarter, as the company's net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed by 25 basis points to 3.30%.

KBW analyst Christopher McGratty said on Oct. 16 after Commerce announced its third-quarter results that "CBSH has strung together consecutive quarters of fairly healthy loan growth (5.5% and 11%, respectively, ann.), which should help to alleviate some, but not all, of the margin pressure it is experiencing."

With so much excess capital "and a strong dividend history (44 straight years of an increase)," and in light of the possible elimination of the 15% cap on federal income taxes on qualified investment dividend income in 2013, McGratty said there was a good possibility for the company to declare a special dividend.

Commerce did just that on Nov. 2, declaring a special dividend of $1.50, along with a 5% stock dividend, payable on Dec. 17 to shareholders of record, as of Nov. 30.

CBSH Chart CBSH data by YCharts

Interested in more on Commerce Bancshares? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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