Cullen / Frost Bankers, Inc.: Strong Performer in a Troubled Industry

(This article originally appeared on The DIV-Net January 12, 2009.)

Linked here is a detailed quantitative analysis of Cullen/Frost Bankers, Inc. (CFR). Below are some highlights from the above linked analysis:

Company Description: Cullen/Frost Bankers, Inc., through its subsidiaries, provides banking and financial services primarily in Texas.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

CFR is trading at a discount to 1 and 3, above. If I exclude the high and low valuations and average the remaining two, CFR is trading at a 9.8% discount. CFR earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

CFR earned one Star in this section for 3, above. CFR has paid a cash dividend to shareholders every year since 1993 and has increased its dividend payments for 14 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to >MMA

CFR earned both of the available Stars in this section. The NPV MMA Diff. of the $7,820 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as CFR has. CFR's current yield of 3.75% exceeds the 3.54% estimated 20-year average MMA rate.

Other: CFR is a member of the Broad Dividend Achievers™ Index. While other financial institutions are lining up for a cash infusion from the Troubled Assets Relief Program (TARP), CFR took a line from Nancy Reagan and, ‘Just said no.’

In a 2008 statement, Dick Evans, Cullen/Frost's chairman and CEO said:

Cullen/Frost is well capitalized now and for the foreseeable future, with sufficient capital to grow our business and take advantage of acquisition opportunities.

Operating in a robust and growing Texas economy, CFR exhibits strong credit quality in its loan portfolio and tends to produce relatively stable financial results. Trading at a discount to it historical P/E, some view CFR as an attractive takeover candidate. Risks include unfavorable changes in the slope of the yield curve, operational performance and additional deterioration of the credit market.

Conclusion: CFR earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks CFR as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $44.95 before CFR's NPV MMA Differential fell to the $7,500 that I like to see. At that price the stock would yield 3.69%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $7,500 NPV MMA Differential, the calculated rate is 7.6%. This dividend growth rate is virtually the same as the the 7.8% used in this analysis.

By not accepting TARP funds CFR is in a position to continue to raise its dividend. With a risk rating of 1.25 (low), it is a stock that I will consider adding to my portfolio below its buy price of $44.95. For additional information, including CFR's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in CFR (0.0% of my Income Portfolio).

Comments

[Alan Brochs...:]

I have written positively about CFR and have highly favorable views of management. I sold out my position in Q4, though, as even the best of the banks are now challenged beyond what we can imagine. Texas was an oasis, but it is rapidly turning into a nightmare post-crisis from late Q3. CFR has a destination of 1-1.5X tangible book value, which hopefully they can maintain at its current $950mm or even grow slightly. Giving them some credit, let's use $1 billion. That works out to just $17-25 per share. Yikes.

Jan 21 09:02 AM

[notsosmart:]

just stay away from banks.there is other good stuff to suck in your money.

Jan 21 10:32 AM

[granger:]

I am waiting patiently on the sidelines, agree with Cullen's quality though

impact from oil? weakened Texas economy? thoughts

Jan 24 05:27 AM