Monday September 10, 2012
by Chuck Carlson, editor DRIP Investor
Few industries have as many question marks -- sluggish economic growth, regulations, low interest rates and exposure to euro-zone ills -- as the banking sector.
So why buy bank stocks? For starters, certain players in the group seem to be bucking the problems. Banks focused on mortgage and refinancing businesses have been showing operating momentum. Problem loans are down, poor earnings in recent years are creating easy comparisons and many banks are back boosting dividends again.
Still, venturing into bank stocks requires plenty of due diligence. Fortunately, our Quadrix® stock-rating system does a nice job of ferreting out opportunities in the group.
The following stocks score above 75 (out of a possible 100) in the Overall Quadrix number, placing them in the top quartile of performers among the some 4,000 stocks scored in Quadrix. And each offers a direct-purchase plan whereby any investor may buy the ﬁrst share and every share of stock directly.
Fifth Third Bancorp (FITB), based in Cincinnati, offers banking services through more than 1,300 full-service banking centers in the Midwest and Southeast.
Fifth Third shows broad-based strength in our Quadrix system, with the stock scoring quite well in Overall (91 out of a possible 100) as well as such categories as Momentum (87), Value (78), and Performance (84).
I like stocks that score well in both growth and value metrics and trade at attractive valuations, and Fifth Third is offering the complete package.
The company just recently received clearance from the Federal Reserve to boost its dividend up to 25% to a quarterly rate of $0.10 per share. The new dividend should be approved later this year. The stock’s yield based on the expected $0.10 quarterly payout is 2.6%.
The company also plans to buy back up to $600 million worth of its stock. Fifth Third was a $43 stock in 2007, so there is plenty of upside here as the company’s operations continue to improve.
J.P. Morgan (JPM) has an Overall Quadrix score of 76 that places it near the top of its peer group of major money center banks.
Because of the company’s size and sprawl, J.P. Morgan seems to get ensnared in virtually every problem area in the banking sector. The firm’s highly publicized trading ﬁasco certainly took the shine off these shares with investors.
However, I think the stock represents a value opportunity in the group. The current yield of more than 3% pays you while you wait for a rebound in the stock price.
And I believe such a rebound will occur if J.P. Morgan can calm investor fears over the next couple of quarters by putting up decent results. The stock trades at a 20% discount to its 52-week high of $46.49 and is a buy at current prices.
By far the smallest bank reviewed here in terms of market cap ($1.2 billion), Old National Bancorp (ONB) is not small when it comes to its Quadrix scores.
The Indiana-based bank has an Overall score of 88. The bank put up outstanding earnings in the second quarter, with per-share proﬁ ts rising 60%. The firm is benefiting from solid loan growth and shrinking problem loans.
The stock, yielding nearly 3%, has performed well of late and is around its 52-week high.
However, these shares have decent upside potential, and the smallish size of the bank gives it appeal as a takeover play.
U.S. Bancorp (USB) is one of the higher-quality plays in the group. Its quality is evident by its Overall Quadrix score of 92. The ﬁrm is posting decent revenue growth at a time when its peers are struggling to generate any top-line growth. Reﬂecting its strength, U.S. Bancorp’s bottom line should set an all-time record this year.
The strong rebound in proﬁts has afforded good dividend growth. The firm raised its dividend 56% earlier this year. The shares, yielding 2.4%, are trading just off their 52-week high of $34.10. Investors wanting a safer play in the banking sector should consider these shares.
Wells Fargo (WFC) is another bank that will post record per-share proﬁts this year. The ﬁrm is feasting on demand for mortgages and reﬁnancings.
Wells Fargo is the market- share leader in the mortgage area, controlling one in three mortgages in the U.S. That kind of market share brings cries of “too big to fail” and other criticisms.
Nevertheless, Wall Street seems to like what it sees. The stock has handily outperformed the broad market over the last year. These shares, yielding 2.6%, should beneﬁt from continued bottom-line growth and dividend increases. The stock is a quality buy in the group.
Learn more about this financial newsletter at Chuck Carlson's DRIP Investor.