Banks are currently experiencing a declining refinance market, a decline of affordability of new homes, and a yield curve which isn't really acting as a tailwind yet. I have personal experience with the first two issues and I'd like to take a look at the large-cap regional bank BB&T Corporation (BBT) which operates mainly in the Mid-Atlantic region of the country. The stock is up 22.19% in 2013 and is beating the S&P 500, which has gained 18.46% in the same timeframe, and with that in mind I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if it's worth picking up some more of BB&T right now for the financial sector of my dividend portfolio.
BB&T currently trades at a trailing 12-month P/E ratio of 14.58, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 11.51 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $3.09 per share and I'd consider the stock cheap until at least $46.35. The one-year PEG ratio (2.53), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that BB&T is expensively priced based on a 1-year EPS growth rate of 5.75%.
On a financial basis the things I look for are the dividend payouts, return on assets, equity and investment. BB&T boasts a dividend of 2.59% with a payout ratio of 34.8% while sporting return on assets, equity and investment values of 0.9%, 9.1% and 10.6%, respectively, which are all OK values, but nothing to write home about. Because I believe the market may get a bit choppy here and would like a safety play I believe the 2.59% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past three years after having cooled the increases during the financial crisis, but prior to the financial crisis the company had been raising the dividend for 37 years.
Looking first at the relative strength index chart (RSI) at the top, I see the stock muddling around in middle territory with a value of 58.95 but with downward trajectory, which is a bearish pattern. To confirm that, I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is below the red line with the divergence bars increasing in height to the downside, indicating the stock has downward momentum. As for the stock price itself ($35.57), it is resting at the 20-day moving average and I'm looking at $36.39 to act as resistance and $35 to act as support for a risk/reward ratio, which plays out to be -1.6% to 2.3%.
- Raymond James downgraded BB&T to "Outperform" from a "Strong Buy" and lowered the price target to $38 a day after BB&T beat on earnings, citing the bank had run up on valuation.
- On July 18 the company reported second quarter earnings of $0.77 per share beating analyst estimates by $0.03 and revenue of $2.5 billion which beat estimates by $0.04 billion.
- The company went ex-dividend on Aug. 7 with a $0.23 per share dividend which will be payable on Sept. 3 for a yield of 2.59%.
If an improving economy is on the horizon then it should be good for bank earnings because they can make more off of rising interest rates. In general, small banks were hit hard during the financial crisis because they had big loan losses on delinquent mortgages but BB&T has a more diversified model as it does more servicing of commercial clients as opposed to residential. BB&T is inexpensively valued based on future earnings but expensive on future growth prospects (one-year outlook). Financially, the dividend payout ratio is low and I don't doubt management will continue to increase the dividend going forward. The technical situation of how the stock is currently trading is what is telling me that it can trade a bit lower for now as the stock has downward trajectory on the RSI and MACD charts. I'm going to buy a small batch in the stock for now.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!