Company Description: Community Trust Bank Corp. owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky and West Virginia; and a trust company.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
CTBI is trading at a discount to 1.), 3.) and 4.) above. The stock is trading at a 6.2% discount to its calculated fair value of $24.99. CTBI earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
CTBI earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years, and another Star was earned as a result of its most recent Debt to Total Capital being less than 45%. The stock earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1950 and has increased its dividend payments for 29 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:
- NPV MMA Diff.
- Years to > MMA
CTBI earned a Star in this section for its NPV MMA Diff. of the $830. This amount is in excess of the $600 target I look for in a stock that has increased dividends as long as CTBI has. The stock’s current yield of 5.12% exceeds the 3.9% estimated 20-year average MMA rate.
Other: CTBI is a member of the Broad Dividend Achievers™ Index.
Conclusion: CTBI earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CTBI as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $25.85 before CTBI’s NPV MMA Differential decreased to the $600 that I like to see for a stock with 29 years of consecutive dividend increases. At that price the stock would yield 4.64%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $600 NPV MMA Differential, the calculated rate is 1.5%. This dividend growth rate is less than the 2.6% used in this analysis, thus providing a margin of safety. CTBI has a risk rating of 1.25 which classifies it as a low risk stock.
CTBI is an interesting stock. Its debt position and cash flow are excellent. Though revenue and earnings were down in 2008, free cash flow was up. On a trailing twelve month basis, most metrics have improved since 2008. Although the stock is trading below my buy price of $24.99, I will wait for CTBI’s next dividend increase (scheduled for December) before deciding to buy or not. For additional information, including the stock’s dividend history, please refer to its data page.
Full Disclosure: At the time of this writing, I held no position in CTBI.
This article originally appeared on The DIV-Net November 16, 2009.