Thursday, July 28, 2011

Ready For Banks?

Before the financial crisis of 2008-2009, financial stocks (especially banks) made up large portions of dividend investor's portfolios. This was for good reason. There were many dividends to be had from banks and other financial institutions. I started dividend growth investing in mid-2010, so I didn't have the pleasure (note the sarcasm) of watching my bank holdings plummet in value after various dangerous and risky investments came to light, forcing dividend cuts across the board. On Monday banks were touting the ability to maintain the dividend, and on Tuesday they were cutting it down to almost nothing.

I currently have no allocation to any banks at all. My only financial position is in Harleysville Group, an insurance company. My portfolio is instead heavily concentrated on energy, consumer staples and health care. Is this a good time to initiate positions with banks? Foresight is a superpower and hindsight is 20/ only time will tell if this is historically a good time to get into banks.

Of all the banks, I have my eye on two.

1. Wells Fargo & Company (WFC)

They have rebounded pretty nicely from the financial crisis. The economy is still lingering in stigma and lacks growth catalysts. Unemployment is stubbornly high. People don't have the credit or money to borrow and banks don't want any risky loans on the books. This creates a bit of a standoff that is not conducive to growth. However, they have grown earnings substantially from .70 EPS in 2008 to 2.21 EPS in 2010. The acquisition of Wachovia provides them an opportunity to become a nationwide bank with a larger footprint and much greater base of deposits. This bodes well for future growth. The debt is in line and earnings should pick up steam with the rest of the economy. The dividend yield is currently at 1.68%, with a lowly payout ratio of 21%. There is a lot of room for growth here, as they are free to raise their dividend after repaying their TARP funds. They are trading at a very attractive forward P/E ratio of 8.2.

2. U.S. Bancorp (USB)

The same catalysts that are needed for growth at Wells Fargo are also needed at U.S. Bancorp. The general growth of the economy, relaxed lending and cash flowing freely will bode well for this bank. U.S. Bancorp has also rebounded very nicely since the crisis. They grew EPS from 1.61 in 2008 to EPS of 1.73 in 2010. Revenues largely grew at a steady clip. The entry yield is at 1.91%, which isn't anything to be excited about. The payout ratio is very low, however, at 27% which leaves a ton of room for dividend growth assuming a return to normalized earnings. They are trading at a forward P/E ratio of 9.7.

Overall, banks are still dicey in my opinion. The low yields leave a lot to be desired, but I believe patient investors will be rewarded with swift raises in the payouts for both of these companies. The valuations are low, but I wonder if they are low enough to make one of these companies an addition to a well-oiled portfolio. The volatility is a little high with banks, so weak stomachs are to stay away.

Of the two banks, I'm more bullish on Wells Fargo. Warren Buffett has investments with both banks, with a substantial position size in Wells Fargo. I'm currently adopting a wait-and-see approach with banks.

Full Disclosure: None

Are you ready for banks?

Thanks for reading.

This article was written by Dividend Mantra . If you enjoyed this article, please consider subscribing to my feed.


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