We began our search by focusing on the 45 stocks that recently landed on the Institutional Ownership screen, which is designed to find companies where professional money managers have small but increasing stakes. We then filtered this list for companies that also appeared on the Income Stocks screen, which looks for companies with superior dividends. This shortened our list to only two regional banks: Kentucky-based Community Trust Bancorp and Florida-domiciled Capital City Bank Group, Inc. (CCBG).
To shorten our list down to only one name, we decided to focus on recent earnings and valuation. Specifically, we wanted the company that was not only growing its earnings faster over both the trailing 12-month [TTM] and most recent quarter [MRQ] periods, but also had the lowest price tag, on the basis of price to earnings [P/E] ratio. This is where Community Trust pulled out ahead.
As indicated below, Community Trust's MRQ and TTM earnings per share [EPS] growth rates not only surpass those posted by Capital City Bank, but also the averages for the regional bank industry.
Learn about Growth Rate Ratios
Also, we find that Community Trust has a lower price tag. CTBI shares are priced at a discount to CCBG shares and the industry norm on the basis of P/E and some other key valuation metrics.
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To find companies that have increasing levels of institutional ownership, the Institutional Ownership screen requires that purchases net of those sold by mutual funds, pensions and other types of money managers must have risen in each of the last two quarters. While seeing an increasing amount of interest is nice, we are also concerned about how much money managers own. After all, if they already own a large chunk, then the level of interest might be nearly saturated. Of course, if managers own only a small piece, then we should wonder why so many others are avoiding it.
To strike a balance regarding ownership, the screen requires that institutions own more than 10 percent of the common shares. While that gives us a lower boundary, we also want an upper limit. For this, the screen constrains the percent of institutional ownership to be less than the industry norm. As indicated above, money managers own nearly 41 percent of Community Trust, below the regional bank average of 45 percent.
The screen also takes steps to take into consideration the amount of research that these money managers have on a company. It requires that at least two analysts cover a company. At present, there are four analysts who provide full-year EPS estimates to Reuters for 2006 and 2007. It is worth noting that the consensus estimate has increased of late. Two months ago, these analysts on average expected Community Trust to post EPS of $2.50 this year. At present, they look for the bank to register $2.55. The mean EPS estimate for 2007 has also risen, from $2.61 two months back to $2.63 at present.
While the bank's earnings growth rates, and analyst expectations for future gains, are appealing, it is Community Trust's solid dividend improvement that helped the regional lender also land on the screen for Income Stocks. The screen requires that a company's dividend growth rate must be greater than 10 percent faster than the industry norm. As indicated below, Community Trust's dividend growth pace over the last five years is nearly 19 percent faster than the industry mean.
Learn about Dividend Ratios
Although it is nice to see a company increasing its dividend, we also need to focus on how much of earnings the firm is actually paying out. It is easy to post fast growth rates when starting from a small base. But, slightly faster dividend growth rates could still leave shareholders with a smaller piece of the earnings pie than what they could receive elsewhere. Similarly, we also want to be on guard against companies that have beefed up dividends in recent years, but now dole out so much that enough is not reinvested to help grow the company. To balance these concerns, the screen requires that a company's TTM payout ratio - the amount of earnings that are doled out to investors in the form of dividends - must be no more than 25 percent above the industry norm. As indicated above, Community Trust's payout ratio, at only about 6 percent above the regional bank mean, easily satisfies this requirement and helps secure Community Trust's position on the Income Stocks screen.
At the time of publication, Erik Dellith did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.