Dividend Analysis: Compass Bancshares Inc

The next S&P 500 Dividend Aristocrat to apply for membership in our portfolio of superior dividend yielding stocks is Compass Bancshares Inc (CBSS) which trades on the NASDAQ under the symbol CBSS. Let’s see if this application will be accepted!

Company Profile:

From Yahoo Finance

Compass Bancshares, Inc. operates as the holding company for Compass Bank and Central Bank of the South, which provide commercial banking and trust services in the United States. The company accepts deposit products, including savings, demand, time, and certificates of deposit. Its portfolio is comprised of commercial, financial, and agricultural loans; real estate construction loans; commercial real estate mortgage loans; residential real estate mortgage loans; equity lines of credit; and equity loans.

The company also offers wealth management services, such as portfolio management and administration, and investment services to estates, trusts, and employee benefit plans; agency services for term life insurance, fixed rate annuities, property and casualty insurance, and other insurance products; investment advisory services; and distributes various investment services and products, including institutional sales, bond accounting, safekeeping, and interest rate risk analysis services to the institutional and individual investors. Further, it provides discount brokerage services, mutual funds, and variable annuities to individuals and businesses, as well as offers lease financing services to individuals and businesses.

Market capitalization is $9.27B and employs approximately 8,400 people.

Company Fundamentals:

As is the case for most financials, finding the return on invested capital is difficult. I was able to find the 5 year average ROIC of 6.9% and last year’s ROIC of 7.27%.

In these cases, I resort to looking at the return on equity which is easily found. In this case, CBSS has delivered a very steady and consistent ROE over the last 10 years. The 10 year average is 16.51% and the 5 year average is 16.94%. Last year’s ROE was 16.03%. I admire consistency in my solid dividend payers.

The equity growth rate has also been very steady but with a slight up tick in 2006. The 9 year average equity growth rate is 9.06%, the 5 year average is 8.79%, the 3 year average is 11.91% and last year’s equity growth rate was 19.94%. Was last year’s equity growth rate an anomaly? Whether it is or isn’t, it seems that you can count on the historical 9% equity growth rate for CBSS.

Earnings per share growth rates have been directly in line with the equity growth rates and have been consistently in the 9% to 10% range. Sales growth rates hit a real lull between 2003 and 2005 by dropping into the 6% to 7% range. But overall, we are still looking at that 9% to 10% growth rate which seems to have been the magic number for CBSS.

The fundamentals look conservative but steady. I would have to say so far so good.

Dividend Fundamentals:

CBSS has a current dividend yield of 2.47%. This is better than the yield from the S&P 500 index [1.98%] and the DJIA [2.29%]. However, it is much lower than many of the other banks such as Bank of America (BOA) and US Bancorp (USB).

However, CBSS has delivered consistent dividend growth rates at almost 12% over the last 5 years. In fact, over the entire 10 year period, the dividend growth rate has been 10.21%. Over the last 5 years, it has been 11.34%. The dividend payout ratio has remained relatively steady increasing from a low of 40.45% to its current 44.83%. Still a fairly conservative payout ratio.
One concern is that cash flow growth rates have been declining over the last 10 years from a 9 year average of 9.93% to a 5 year average of 7.46% to last year’s 5.71%.

Valuation Models:

From the fundamentals, CBSS seems to be a contender. Let’s see how Mr. Market has this stock priced by using my 3 valuations methods.

From a dividend yield perspective, this stock is currently expensive. The 10 year average high dividend yield is 3.94% and the 5 year average high dividend yield is 3.51%. Today’s 2.47% dividend yield is paltry compared to those yields. If I demand the 5 year average high dividend yield, then the most I will be willing to pay for this stock is $49.00. At the current price of $69.63, that is a premium of 42.09%.

Benjamin Graham would concur! The Graham number works out to $41.29 which is a premium of 68.64%.

For my discounted present value model, I used the following inputs:

future P/E of 13.91 [the 10 year average P/E]

future EPS growth rate of 8.79% [the 5 year equity growth rate which is lower than analysts’ forecast of 10.5%]

dividend yield of 3.51% [5 year average high dividend yield]

dividend growth rate of 11.34%

With these inputs, my model price is $47.55. Once again, from the current price of 69.63, a premium of 46.44% currently exists.

Compare my CBSS calculations with yours.

Here is the 1 year stock price chart:

Stock Price Chart for CBSS

As you can see, CBSS has had a terrific run up over the last 12 months which is why all my valuation methods show that it is overpriced. In fact, the only time we could have bought this stock at a fair price was at the very beginning of this 1 year chart!

Conclusion:

I would argue that CBSS would have been a good member in our portfolio. Unfortunately, it is over priced by all my valuation methods [and consistently overpriced!].

Full Disclosure: I do not own any shares in CBSS.

Comments

[cfbrad]

Apparently the writer of the CBSS review above has not hear of the purchase of the bank by the Spanish Bank due to close in the 4th qt. carrell Bradley