Raise the Red Flag for Corus Bankshares' Huge Dividend

Aug.31.07 | About: Corus Bankshares (CORS)

Hold on to your hats for this one; Corus Bankshares Inc (Nasdaq: CORS) currently has a dividend yield of 7.20%! Could this be another member of our portfolio of superior dividend yielding stocks? Let’s find out.

Company Profile:

From Yahoo Finance

Corus Bankshares, Inc. operates as the holding company for Corus Bank, N.A. which offers consumer and corporate banking products and services. The bank’s deposit products include checking, savings, money market, and time deposit accounts. Its loan portfolio primarily comprises commercial real estate loans, including condominium construction and condominium conversion loans; commercial loans; and residential real estate loans.

The bank focuses its lending activities in various metropolitan areas in Florida and California, as well as in Las Vegas, New York City, and the Washington, D.C. It also provides safe deposit boxes, as well as clearing, depository, and credit services to check cashing industry locations in the Chicago area and in Milwaukee, Wisconsin.

Market capitalization is $766M.

Company Fundamentals:

The return on invested capital [ROIC] has been much better than I have seen with other financials. The 5 year average ROIC is 12%, while last year’s ROIC was 15.42%. Typically, I see an ROIC in the 4% - 7% range for banking stocks.

The return on equity has been very consistent with a 10 year average ROE of 14.38% and a 5 year average ROE of 15.43%.

Equity growth rate has also been very consistent and trending upwards. The 9 year rate is 12.79%. The 5 year rate is slightly higher at 13.34%. The 3 year rate is 15.42% and last year’s equity growth rate was 21.58%.

Earnings per share growth rates have been even more impressive. The 9 year rate is 17.53%. The 5 year rate is 32.24%. The 3 year rate increases to a whopping 42.47%! Last year’s rate comes down slightly to a still impressive 38.98%.

Sales growth rates have also been trending upwards. The 9 year rate is 11.9%. The 5 year rate increases to 24.3%. The 3 year rate stands at 35.46% and last year’s sales growth rate came back down to 30.67%.

From the company fundamentals, this stock looks like a champ.

Dividend Fundamentals:

As I stated at the top, the current dividend yield is 7.2%! That handily beats the dividend yield available on the S&P 500 Index and the DJIA combined!

The dividend growth rate has definitely been sporadic with two very large increases in 2003 (161%) and 2004 (50%). However, from 1999 to 2002, the dividend increases were under 4% per year. Those 2 big years really skew the averages and gives a 9 year rate of 26.69%. You can imagine that as we get closer to those big years, the rates really pop. The 5 year rate is 47.84%. Last year’s dividend growth rate was 28.57%.

And the dividend payout ratio is quite low at 27.44%. Much more conservative than most of the banks that we have analyzed in the past.

Cash flow growth rates have been stupendous, with the 9 year rate at 16%. The 5 year rate climbs to 30.93%. And last year’s cash flow growth rate was 37.65%.

A couple of worrisome indicators here. Firstly, such a huge dividend yield should raise a flag. Remember, the bigger the reward, the higher the risk. Secondly, the erratic nature of the dividend growth rates are a concern. The last 5 years do not resemble the first 5 years at all.

Valuation Models:

Let’s use my 3 models to determine a fair price for this dividend paying company.

From a dividend yield perspective, you would expect the 7.2% to be on the high side. And you would be right. In fact, it is much, much larger than the average high dividend yields in the past. A red flag in my book. The 10 year average high dividend yield is 2.89%. The 5 year average high dividend yield is 3.53%. So the current yield is basically double of the 5 year average.

As investors, if we demand the 5 year average high dividend yield, then the model price works out to $28.29. At the current price of $13.88, that would mean that Mr. Market has this stock on a 50% sale.

In fact, Mr. Graham would agree wholeheartedly! The Graham number works out to $31.30 which implies a discount of 55%.

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

  • future P/E of 4.79 (current P/E and is at a considerable low compared to its historical P/E ratios)
  • future EPS growth rate of 12.79% (derived from the 9 year equity growth rate. Unfortunately, I was not able to find any estimates from the analysts.)
  • dividend yield of 3.53%
  • future dividend growth rate of 0% (although the 9 year dividend growth rate is 26.69%, the inconsistencies in the growth rate has caused me to be conservative and assume no future dividend growth.)
  • With this information, the model price works out to $15.63 or an 11.21% discount.

    Here is my dividend analysis for CORS.

    CORS has been on a tremendous slide. The falling stock price has obviously resulted in the very high dividend yield.

    Conclusion:

    Although that 7.2% dividend yield is incredibly tempting, a few red flags have raised their ugly heads. The fact that the current dividend yield is double the 5 year average high dividend yield is a concern.

    The sporadic dividend growth rates are a concern. The 1 year stock price chart shows a very ugly downward trend.

    All this information should make the little hairs on the back of your neck stand up. If we investigate further, you can see the reason why investors have been punishing this stock. Obviously, the downturn in the real estate market is at work on this stock. And this stock is particularly concentrated in heavily hit areas such as Florida, California and Las Vegas. And much of that exposure is in the condominium real estate market both construction and conversion projects.

    This stock looks shaky. That dividend could be and most likely is in danger. This is one we should stay away from no matter how enticing that dividend yield may appear. Our goal is a safe,income producing portfolio that steadily grows its dividends at a healthy 15% rate.

    Full disclosure: I do not own shares in CORS.