Is The Dividend Worth The Legal Overhang At BB&T?

Sep.25.13 | About: BB&T Corporation (BBT)

Last time I wrote about BB&T Corporation (NYSE:BBT) on August 13, 2013 (click here for the article) I stated that I liked the dividend of the company. Recently the company has gotten into some trouble with the Internal Revenue Service and caused me to sell the stock. BB&T is a financial holding company conducting its business operations primarily through its commercial bank subsidiary, and other non-bank subsidiaries. On July 18, 2013, the company reported second quarter earnings of $0.77 per share, which beat the consensus of analysts' estimates by $0.03. The stock is down 4.78% since last writing about it and is losing to the S&P 500, which has gained 0.47% in the same time frame, 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 I should buy back into the stock after the drop it has experienced.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 13.88, 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 10.94 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $3.10 per share and I'd consider the stock inexpensive until about $47. The 1-year PEG ratio (2.47), 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 the company is expensively priced based on a 1-year EPS growth rate of 5.63%.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.72% with a payout ratio of 38% of trailing 12-month earnings (or 27% of free cash flow) while sporting return on assets, equity and investment values of 0.9%, 9.1% and 10.6%, respectively, which are all respectable values, but nothing to go writing home about. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.72% yield of this company is good enough for me to take shelter in for the time being.

Technicals

Click to enlarge

Looking first at the relative strength index chart (RSI) at the top, I see the stock muddling around in oversold territory with a value of 39.96 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 descending and about to cross below the red line with the divergence bars decreasing in height to the downside, indicating the stock has downward momentum. As for the stock price itself ($33.87), I'm looking at the 20-day moving average to act as resistance and $33.10 to act as support for a risk/reward ratio, which plays out to be -2.27% to 1.03%.

Recent News

  1. US Court of Federal Claims rejected BB&T's request to recover at least $688 million in taxes and fines over a tax evasion scheme called STARS that was set up with Barclays (NYSE:BCS).
  2. Goldman Sachs (NYSE:GS) raised the rating of the company to a "buy" on 17Sep13.

Conclusion

BB&T is inexpensively valued based on future earnings. Financially, the dividend payout ratio is very low based on trailing 12-month earnings and free cash flow. I don't doubt management will be able to continue to increase the dividend going forward and at double digit clips, but they have to get passed their legal overhang first. Based on future earnings the dividend payout ratio goes down to around 29.7% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me we might be seeing some downward pressure in the immediate future. The stock is inexpensive on valuation and has great financials, but the legal overhang is what is going to keep me away from this company 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!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.