Luck of the Allied Irish: AIB's a Dividend Winner

Dividends Matter reader David has requested that we have a look at Allied Irish Banks PLC (AIB) which trades on the NYSE. I thought this would be a great time to study an international bank after having looked at many US banks (Citigroup Inc, US Bancorp, Bank of America) and Canadian banks (Bank of Montreal, Bank of Nova Scotia, National Bank of Canada) recently.

So let’s jump in and see if this bank has suffered recently.

Company Profile:

From Yahoo Finance

Allied Irish Banks, p.l.c., together with its subsidiaries, provides retail and corporate banking, investment banking, and asset management services principally in Ireland, the United States, the United Kingdom, and Poland.

Market capitalization of $24.63B and employs 23,300 people.

Company Fundamentals:

Return on invested capital shows the usually low returns offered by financials. The 5 year average ROIC is 4.50% and last year’s ROIC is 3.55%. However, AIB has been able to produce an excellent return on equity. The 10 year average ROE is 20.54% and the 5 year average ROE is 20.50%. Last year’s ROE came in at 24.05%. Excellent, consistent return on equity.

Equity growth rate has been increasing over the last 10 years. The 9 year average is 15.24%. The 5 year average increases to 17.61%. The 3 year average gets even better at 19.42% and last year’s equity growth rate was an outstanding 33.76%. Excellent trend.

And earnings per share growth rate has been just as impressive, improving from its 9 year average EPS growth rate of 14.5% to its 5 year rate of 21.68%, to last year’s phenomenal rate of 73.98%!

Sales growth rates have been quite consistent over the 10 year period in the 11% range.

The fundamentals look great. Let’s check out the dividend data!

Dividend Fundamentals:

The current dividend yield is a very respectable 3.51%. That is much higher than the dividend yield offered by both the S&P 500 Index and the DJIA. However, it is significantly below the yields offered by the US banks (4.5% to 5% range). However, it is comparable to the dividend yields offered by the Canadian banks.

The dividend growth rate has been a bit erratic over the last 10 years, and it actually includes two decreases. However, this is due to the currency exchange. Looking at AIB’s Investor Relations website, AIB has consistently increased its dividends every year since 1990. So I would not panic. The dividend growth rate over the 10 year period is a healthy 13.52%. The 5 year dividend growth rate is even better at 19.6%. But it came back down to earth last year at 7.59%.

Cash flow growth rates have been erratic with lows of -1.22% and highs of 70.17%. Over the 10 year period, these average out to a 9 year rate of 13.33%.

And dividend payout ratio has been decreasing over the last 10 years from 44.87% in 1997 to today’s low of 28.34%. This is one of the lowest payout ratios I have seen for a bank.

Dividend fundamentals look good.

Valuation Models:

Let’s apply my 3 valuation techniques and come up with some target prices.

From a historical dividend yield perspective, this stock is trading at a premium. Although it currently has a healthy yield of 3.51%, the 5 year average high dividend yield is 4.39%. Now granted that the last couple of years have only reached high dividend yields of 4% and 3.94% respectively, this may be a tad bit aggressive. But if we demand the 5 year average high dividend yield, then the target price is $43.43. At a current price of $54.40, that is a premium of 25.27%.

Now, Mr. Benjamin Graham would disagree. The Graham number works out to $57.50 which means that a discount of 5.40% exists today.

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

future P/E of 9.16 (that is the current P/E and is at a historical low)

future EPS growth rate of 15.24% (Although analysts have forecast 19%, I will use my more conservative estimate which is derived from the 9 year average equity growth rate)

dividend yield of 4.39%

future dividend growth rate of 7.59% (last year’s dividend growth rate which is considerably below its 9 year and 5 year averages)

With these inputs, the model price works out to $97.09. Well, that would be a significant discount except that I am not getting my 4.39% minimum dividend yield! But I think it does show that the with a low P/E of 9.16 and a decent future EPS growth rate of 15.24%, this stock looks like it may be fairly priced.

Here are my AIB calculations for your perusal.

Here is the 1 year stock price chart:
click to enlarge

As you can see, AIB has recently suffered along with the rest of the financial markets in the US, although it has been recovering rather quickly. And I think it would be safe to say that AIB does not have exposure to the US sub prime market.

Conclusion:

The company and dividend fundamentals look good. I think that this stock is fairly valued. I believe that this stock is worthy of joining our portfolio of superior dividend yielding stocks. And not to mention the international exposure adds some diversification to our portfolio.

I would like to thank Dividends Matter reader David for bringing this stock to my attention. I only wish I had analyzed it last week!

Full Disclosure: At the time of this writing, I do not own any shares in AIB.