Huntington Bancshares (NASDAQ:HBAN) is a regional bank holding company based in Columbus, Ohio. In December of 2020, HBAN and TCF announced plans to merge via an all-stock transaction. The merger is expected to be completed late in Q2 2021. HBAN plans a significant investment in technology post merger to accelerate customer adoption of digital financial services, an area in which the company has garnered positive recognition. While the shares have rallied dramatically since the merger announcement, the price is currently 6.7% below the 52-week high. The forward P/E is 10.76 and the forward dividend yield is 3.87%.
Price history and basic statistics for HBAN (Source: Seeking Alpha)
There are, of course, many challenges in trying to project the outcomes of the merger and the reduction in the share price in recent months suggests that the market is adjusting expectations. While the Regional Banks sector has returned 8.5% in the past three months, HBAN’s return is 2.4% for the same period.
To evaluate HBAN, I have examined two forms of consensus outlooks for the stock. The first is the well-known Wall Street analyst consensus. The second is the market-implied outlook that is derived from the prices of options on HBAN. Market-implied outlooks have a well-developed research literature, although they are not well-known among individual investors. For those who are not familiar with this concept, I have written an overview post that provides examples and links to the research literature.
eTrade’s Wall Street consensus projection combines the views of 11 ranked analysts who have provided ratings and 12-month price targets within the past 90 days. The consensus rating is bullish and the consensus 12-month price target is $17, 7.87% above the current price. There is relatively little dispersion in the analyst price targets, which increases confidence in the predictive value of the consensus view.
Wall Street analyst consensus rating and 12-month price target for HBAN (Source: eTrade)
Seeking Alpha’s Wall Street consensus calculation includes 17 analysts who have provided opinions in the last 90 days. The consensus rating is bullish and the consensus price target is $17.56, 11.4% above the current price. None of the analysts give HBAN a rating below neutral.
Wall Street analyst consensus rating and price target for HBAN (Source: Seeking Alpha)
The attractiveness of the consensus 12-month price return of 7.9%-11.4% depends on the risk of the stock, of course. The market-implied outlook provides an estimate of future volatility, as discussed in the next section.
I have analyzed call and put options on HBAN at a range of strike prices, all with an expiration date of January 21, 2022, to generate the market-implied price return outlook for the next 8.03 months (from today until the expiration date). I chose this expiration date because the next expiration date is January 20, 2023 and I did not want to go beyond a year out. The level of activity in options trading on HBAN is light, which reduces conviction in the market-implied outlook.
The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal axis (going from most negative on the far left to most positive on the far right).
Market-implied price return probabilities for the 8.03-month period from today until January 21, 2022 (Source: author’s calculations using options quotes from eTrade)
The distribution of price returns is quite symmetric between positive and negative returns. The highest-probability price return (the peak in the chart above) corresponds to a price return of 1.75% for the 8.03 month period and the median return is -1.1%. The annualized volatility derived from this distribution is 30.6%. This level of expected volatility is very similar to what I calculated for Bank of New York Mellon (BK) (32%) and U.S. Bancorp (USB) (30%).
To make it easier to directly compare the probabilities of positive and negative returns, I typically rotate the negative return side of the probability distribution about the vertical axis (see below).
Market-implied price return probabilities for the 8.03-month period from today until January 21, 2022. The negative return side of the distribution has been rotated about the vertical axis (Source: author’s calculations using options quotes from eTrade)
The probabilities of negative and positive returns of the same magnitude are almost identical (the dashed red line is very close to the solid blue line). If HBAN did not pay a dividend, this would be interpreted as a neutral outlook. When a stock pays a dividend, the potential for price gains is reduced relative to the potential for price declines, so having almost equal probabilities of positive and negative returns for HBAN is actually slightly bullish in light of the 3.87% dividend yield.
Selling covered calls on HBAN provides considerable income. This morning, I bought shares of HBAN at $15.72 and sold January 21, 2022 (expiration) calls with a $17.00 strike for $0.778. This net position has option premium yield of 4.9% ($0.778 / $15.72) over the next 8.03 months (which annualizes to 7.4%). This position also retains the first 7.8% in price appreciation (before the price exceeds the option strike price). If this position is maintained for a year, the dividend yield accrued should be ¾ of the annual yield, 2.9%. The estimated total annual income, including the option premium yield and the dividend yield, is expected to be around 10%. This assumes that the option is not exercised and that another call option can be sold at a comparable annualized yield after January 21, 2022. The expected income between today and the option expiration will be the 4.9% dividend yield and 2.9% in dividend yield. HBAN pays dividends quarterly, with ex div dates in March, June, September, and December and payment dates in April, July, October and (early) January, so it is realistic to assume 2.9% in effective dividend yield between now and January 21, 2022 when the options expire. If HBAN rises to $17 or above, the total 8-month return for this position will be 7.08% in price appreciation, plus (estimated) 2.9% in dividend yield, plus 4.9% in option premium yield, for a total return of 15.6%. The market-implied outlook estimates a 68% probability (just over ⅔) that HBAN will end the 8-month period at $17 or below.
HBAN has dropped slightly in recent months as the market assesses the impending merger with TCF. The Wall Street analyst consensus is bullish, with a 12-month target that implies 7.9% to 11.4% in price return. If the dividend per share of the merged entity is maintained at the same level as HBAN’s current dividend (and that is my expectation), the stock would be expected to return 11.8% to 15.3%. With annualized expected volatility of 30%, this level of return is pretty good. The market-implied outlook is slightly bullish and there is nothing that raises concern. Given all of the uncertainties in outcomes with a merger, the well-behaved option-implied outlook is reassuring. With a bullish Wall Street consensus, a slightly bullish market-implied outlook, along with a modest valuation, my view on HBAN is bullish.
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Disclosure: I am/we are long HBAN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have sold covered calls as described in the text.