Dividend Analysis: Wachovia Corporation

Since financials seem to be some of the best bargains at the moment, I thought I would look at another bank, Wachovia Corporation (WB), which trades on the NYSE. Let's find out if this is another big dividend payer to add to our portfolio of superior dividend yielding stocks.

Company Profile:

From Yahoo Finance

Wachovia Corporation operates as a bank holding company. It engages in capital management, the general bank, wealth management, and the corporate and investment bank businesses. The company provides various commercial and retail banking, and trust services through full-service banking offices in the United States. It offers checking, savings, check card, foreign currency, annuities, life insurance, brokerage account transfers, CAP accounts, individual retirement accounts, credit cards, home equity, mortgage, hazard and flood insurance, escrow, taxes, private mortgage insurance, education loans, online services, online banking, online bill pay, and online brokerage services. The company also provides various other financial services, including mortgage banking, investment banking, estate planning, investment advisory, asset management, credit and debit card products, trust services, charitable services, mortgage banking, asset-based lending, leasing, insurance, and international and securities brokerage services.

Its market capitalization is $94.58B.

Company Fundamentals:

As usual, I like to assess management’s performance by looking at the return on invested capital and the return on equity.

Management has produced a fairly low ROIC of 5.1% over the last 5 years. Last year’s ROIC was 3.74%. This is inline with banks such as Washington Mutual (WM), but lower than other banks such as U.S. Bancorp (USB).

Its return on equity has been trending downwards. The 10-year average ROE is 13.51%, and the 5-year average ROE drops to 12.99%. This is fairly consistent, but not producing the 20% ROE that was attained back in 1998, and 1999.

On the other hand, the equity growth rate has been trending higher. The 9-year rate is 8.97%, and that increases to 11.36% over the last 5 years. The 3-year rate is 12.79%, and last year’s equity growth rate was 19.87%.

Its earnings per share growth rate has been interesting due to two monster years in 2001, and 2002 where the equity growth rates were 126%, and 82% respectively. Therefore, it shows quite the performance metrics in the six-year period. The 9-year rate is 6.66%, the 5-year rate soars to 22.10% (thanks in part to the performance in 2002), the 3-year rate drops to 11.1%, and last year’s EPS growth rate was 12.77%. You can see it trending higher if you take the 5-year average out of there.

The sales growth rates have been incredibly steady at around 14% over the 10-year period.

So far, the fundamentals look good.

Dividend Fundamentals:

The current dividend yield is a nice, juicy 4.55%. That is on par with all the other banks, but significantly higher than the S&P 500 Index (2.03%) and the DJIA (2.39%).

Now, it is the dividend growth rate that concerns me. In 2001, the dividend was cut in half! I definitely don’t like to see that! That cut seriously affected the longer term growth rates. The 9-year dividend growth rate is a mere 2.84%. Now, the 5-year rate avoids that 50% decrease (which happened in 2001), and so the dividend growth rate is 19.65%. The 3-year rate is 19.35%, and last year’s dividend growth rate was 10.31%. Other than 2000 where the increase was 2.13%, the 50% decrease in 2001, and the 4.17% increase in 2002, the yearly increases have been excellent. But what worries is management’s commitment to increasing dividends.

The dividend payout ratio sits at 45.73%. However, it has bounced around rather dramatically over the last 10 years.

Its cash flow growth rates have been erratic. The 9-year rate is 2.88%, the 5-year rate jumps to 14.41%, the 3-year rate drops down to 4.84%, and last year’s cash flow growth rate was -2.68%.

Valuation Model:

I use 3 models to determine a fair price for a dividend yielding stock.

From a dividend yield perspective, you would think that this must be an all time high dividend yield. In fact, the 10-year average high dividend yield is 4.47%. So, yes, it is above the average, but just slightly. If we demand a 4.47% yield, then our model price is $50.09. At the current price of $49.24, Mr. Market is currently offering a slight discount of 1.7%.

Mr. Benjamin Graham would argue that the discount is much larger! The Graham number is $62.95, which means a discount of 21.78%!

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

A future EPS growth rate of 8.7% (my initial forecast was 8.97% which was derived from the 9-year equity growth rate, but the analysts have forecast a more conservative 8.7%).

A future P/E of 10.24 (the current P/E which is lower than the historical average).

A dividend yield of 4.47%.

A future dividend growth rate of 10.31% (last year’s dividend growth rate which is more conservative than the 5-year average).

With this information, my model price works out to $53.77. Now, in order to get the 4.47%, I will not be willing to pay any more than $50.09. But it shows that both these methods are in sync.

Compare my WB calculations with yours.

Here is the 1 year stock price chart:

As you can see, there was a beautiful entry point during the peak of the current market correction.

Conclusion:

The cut in dividend back in 2001 really takes this stock out of play for our portfolio of superior dividend yielding stocks. We can get the same yield, and dividend growth rates from other banks that have better histories of dividend growth.

As to the amount of subprime exposure at Wachovia, I am not sure that at this point, it has divulged that information. But no matter, I would prefer other banks such as Citigroup (C), Bank of America (BAC), U.S. Bancorp (USB), and Wells Fargo & Co. (WFC).

Full Disclosure: I do not own shares in WB.

Comments

[Vegasjoe]

So what does your discounted cash flow guess machine suggest now?