A Brief History of Commerce Bancshares' Returns

Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:                                                                                                                                                 

1. Dividends.
2. Earnings growth.
3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Commerce Bancshares (Nasdaq: CBSH  ) .

Commerce shares have returned 103% over the last decade. How'd they get there?

Dividends accounted for a good chunk of it. Without dividends, shares returned 65% over the past 10 years.

Earnings growth over the period was strong, especially given the collapse of the housing market and panic in the financial system. Commerce's normalized earnings per share have grown an average of 6.1% a year since 2001. That's a standout in the industry: Many banks had to issue shares at low prices during the financial crisis to raise capital, diluting existing investors. Plenty more are still choking on bad loans made during the bubble years. Few came out of the crisis as clean as Commerce.

And have a look at its valuation multiple:

Commerce's price-to-book ratio -- one of the most important valuation metrics for banks -- has come down since the bubble days of 2005-2006, but it's still at a fairly healthy level. For comparison, JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) all trade below book value. Wells Fargo (NYSE: WFC  ) trades just slightly above book. Commerce trades at 1.5 times book value.

Part of this premium has to do with how the company handled the recession. Commerce was one of only a few large banks that made it through the 2008 financial crisis without accepting TARP bailout funds. CEO David Kemper said turning down TARP "was one of the best decisions of my adult life." Doing so earned the company a level of confidence that few banks have these days, which has kept its valuation multiple intact while so many others' have plunged.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

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