People's United Financial, Inc. (PBCT) released its Q4 2013 earnings last night after the market close. Here are the highlights:
- Assets increased by $1.7 billion, or 5.4%, in the quarter
- Reported quarterly net income grew by 1.4% to $59.3 million. The asset increase appeared to occur late in the quarter, apparently too late to meaningfully impact earnings
- Net interest margin declined to 3.24% from 3.30% in the prior quarter
- Return on average tangible common equity ("RoATCE") increased to 10.41%, from 10.05%. This increase was helped by the repurchase of 8.9 million shares at an average price of $14.72 per share (about 1.8x tangible book value per share ("TBV-PS")!), or for $131 million in total, during the quarter. Due to the share repurchase and an 81% dividend payout ratio, PBCT's tangible book value fell to $2.43 billion from $2.50 billion in the prior quarter, or by 3%. The reduction was cushioned somewhat by a $34 million increase in "other comprehensive income".
- Because of the asset increase and share buybacks, PBCT's tangible common equity/assets ("TCE/TA") ratio fell to 7.81% in Q4 2013, from 8.52% in the prior quarter. Reported TBV-PS declined to $8.12 in Q4 from $8.14 in Q3.
That last point is especially important. PBCT's excess capital, the excess capital it used to buy back shares and turbocharge the EPS accretion it advertised in acquisitions, is now largely gone. If you thought PBCT might take its TCE/TA ratio as low as 7.5% (PBCT indicated in the Q4 2013 earnings call that this was the floor), that would imply it had about $105 million of excess capital, small relative to its $4.7 billion market cap. Using that same 7.5%, PBCT's excess capital was $3.6 billion in Q2 2007, the quarter in which it completed its second-stage conversion. (Its total tangible common equity at that point was $4.5 billion, just a tad below the current market cap, 6 1/2 years later - isn't it obvious that something has gone horribly wrong here?)
PBCT closed last night at $15.37, or 1.89x TBV-PS. It sports a 4.2% dividend yield. The median sell-side EPS estimates for PBCT as of last night were $0.88 and $1.00, implying 2014 and 2015 EPS growth of 18% and 14%, respectively. That's a tall order to fill if PBCT can't grow assets robustly, which it can't if it has an 81% dividend payout ratio and little or no excess capital.
PBCT's share price increased by 25% in 2013, even though its 2013 EPS of $0.74 was only 2.8% above the $0.72 it earned in 2012. Its dividend yield fell from 5.3% to 4.3% during 2013. And reported TBV-PS fell from $8.71 to $8.12, or by 6.8%. So multiple expansion plus unbridled optimism about the future is what drove PBCT's share price higher. That's why short interest in PBCT shares increased steadily during the year too, from 3.8% of shares outstanding at year-end 2012 to 8.1% at year-end 2013.
Is PBCT worth its current price even if it hits those aggressive EPS estimates? I can own Wells Fargo (WFC), the largest US bank by market cap, at the same price/TBV-PS multiple and a far lower price/2015 EPS multiple. WFC's RoATCE is nearly twice as high as PBCT's, and WFC's TCE/TA is a little bit higher. And while WFC's estimated EPS growth is more modest than PBCT's, WFC delivers, and without financial engineering.
Why is PBCT's expected EPS growth, unlikely though it may be, perceived by some investors to be worth so much?
I don't know what's holding PBCT's stock price up. I'm reminded of the old Wile E. Coyote cartoon in which the coyote runs off a cliff and keeps running but doesn't fall until he realizes there's nothing but air beneath him. That happens sometimes in the stock market too - valuations supported by nothing but air.
If only the market were as forgiving as that cartoon was to Wile.