Commerce Bancshares

A Dividend King in the banking sector

Banks are currently facing massive challenges for the future. Digitalization, artificial intelligence and innovative fintechs are really shaking up the traditional banking concept. Digital offerings are springing up everywhere, while outdated bank branches are having to close in many places. According to experts, it's only a matter of time before tech giants like Google, Apple, Amazon or Facebook, which have already pushed into the financial industry, offer their own bank accounts and could thus become serious competition for banks. A long-lasting low interest rate policy isn't exactly helping here either.

Nevertheless, there's agreement that banks will continue to play an important role in the future. To do so, however, they have to transform from product sellers into solution providers. The customer has to be at the center, not the high-commission equity fund with high management fees. Commerce Bank, which by the way was named the best bank in America for customer satisfaction just this year, has also been making investors happy for decades. Let's take a closer look at the company today.

The origins and business model of Commerce Bancshares Inc.

For the story of how today's bank holding company Commerce Bancshares Inc. came about, I have to go back a little. So let's take a short trip back in time to the late 17th century, when colonies gradually formed along the east coast of North America. These first 13 colonies naturally traded with each other, but also with Europe - above all in raw materials such as tobacco and cotton. A new currency was needed for this purpose, and it quickly emerged. The British Empire did try to ban this independent currency, but in the end people switched to Spanish or Dutch means of payment. By the way, this is also when the term "Spanish Dollars" came about - derived from the taler. A few years after the American Revolutionary War, the dollar finally prevailed as the new currency. However, there was no government regulation yet, which led to banks (which back then literally anyone who wanted to could found) printing their own money. These banknotes looked different and could only be exchanged at the bank that issued them. So if a bank went bust, its money was worthless too. It was only the National Currency Act, which President Lincoln signed in the spring of 1863, that reformed the whole system and brought order.

When the American Civil War ended in 1865, the economy of the United States grew at an unprecedented pace. Especially in Kansas City, an important hub for opening up the West, population numbers grew rapidly and trade picked up briskly. Francis Reid Long recognized this potential, put up 10,000 dollars and decided, together with his colleague Nathaniel Grant and A. S. Branham, to found Long, Grant & Company. A little later they renamed it the Kansas City Savings Association. Every growing community needs a service provider that finances new businesses such as grocery stores, transportation factories or warehouses. Francis was highly respected in the city, so much so that he was elected mayor in 1869. That same year, construction of the Hannibal Bridge, the first crossing of the Missouri River, was completed. This accelerated the city's growth once again and established Kansas City as an important transportation hub between Chicago and the Southwest.

The Kansas City Savings Association benefited from the growth and the good economic situation of the region, while at the same time running its business very conservatively, unlike some other banks. It financed companies as they were founded and expanded, but kept a very close eye on its loans. Francis gradually withdrew from the business and the bank changed hands several times, until Dr. William Stone Woods secured a majority stake in 1881. He reorganized the bank, renamed it the National Bank of Commerce and modernized its business practices. He also tried to open more branches, but the law at the time prohibited it - so without further ado he bought a number of other banks in neighboring states. The bank's conservative stance paid off when hundreds of banks went bust during several financial crises. To this day, the bank holding company Commerce Bancshares Inc. has been able to grow strongly in America's Midwest. It offers general banking services for both private and business customers and, in addition to retail and corporate banking, also handles wealth management and investment banking.

How might Commerce Bancshares develop in the future?

First, let's briefly summarize the business model of the bank holding company headquartered in Kansas City (Missouri) once more. Commerce Bancshares Inc. is ultimately just the parent company of Commerce Bank, which in turn offers a broad range of financial services through its subsidiaries - among them banking for private and corporate customers, wealth management, as well as investment and estate planning. It currently employs over 4,766 people in 157 full-service bank branches in Missouri, Kansas, Illinois, Oklahoma and Colorado. Commerce Bancshares has divided its business into three operating segments:

• Consumer Banking: This is where it operates the branch network and handles lending services, including mortgages, debit/credit cards and installment loans for individuals.
• Commercial Banking: This segment is responsible for granting business loans and.
• Wealth Management: Here it offers trust and estate planning services, brokerage and investment management services for wealthy clients. This is also where the bank's own investment funds are managed.

Now let's take a look at the figures for the most recently published quarter (Q1 2021 - ended March 31, 2021). In the period from January to March 2021, Commerce Bancshares Inc. managed to increase revenue by a solid 5.3 percent to 341.8 million US dollars. Thanks to lower expenses, profit rose from USD 49.6 million in Q1 2020 to USD 130.9 million now. Broken down per share, that means an earnings increase of almost 164 percent to USD 1.11 - a result you can definitely be more than satisfied with.

As already mentioned in the introduction, banks will face strong competition in the future. Commerce Bank certainly won't be spared either, but I still believe it has good prospects ahead over the next years and decades. For the bank from the Midwest, the customer has always been at the center - it wants to become a "super community bank" and is continuously working on improvements in the areas of customer service, digitalization and sustainability to get there. It also doesn't shy away from selling off poorly performing business units. To sum up, you could say that Commerce Bancshares Inc. is well positioned for the future and should keep putting a big smile on its shareholders' faces for a long time to come.

What about the dividend?

In old archive texts I found out that the Kansas City Savings Association was already paying a semiannual dividend in 1887. Unfortunately, I couldn't tell from them whether it has always been paid or raised since then. What can be said for certain, though, is that a dividend has been paid every year since at least 1968 and that it has also been raised every year. That makes Commerce Bancshares one of the few coveted Dividend Kings. The dividend growth rate over the last 10 years is 5.5 percent. The current dividend yield of 1.4 percent is solid, and the payout ratio of 29.8 percent reflects a healthy dividend policy.

Conclusion:
Banks, just like many other industries, will have to transform in the future. In my eyes, the chances are exceptionally good that Commerce Bancshares will succeed in this transformation. Long-term investors looking for a reliable dividend payer with growth potential should take a closer look at the company.