- MTB has two major growth catalysts in place.
- MTB is offering a 3.1% dividend yield, with ample room for meaningful dividend hikes in the upcoming years.
- MTB is trading at a price-to-earnings ratio of only 11.5.
The S&P 500 has more than doubled off its bottom in 2020 and has posted 69 new all-time highs in the last 12 months. As a result, investors now struggle to identify cheaply valued stocks. M&T Bank (NYSE:MTB) is a bright exception. It has promising growth prospects, it is offering an attractive dividend yield of 3.1% and it is cheaply valued. Therefore, the stock is likely to highly reward those who purchase it around its current price.
M&T Bank is a regional bank, which has 695 branches in New York, Maryland, Pennsylvania, Delaware, Connecticut and West Virginia.
In 2020, the company was hurt by the coronavirus crisis, which caused a fierce recession and led the bank to greatly increase its provisions for loan losses. It thus incurred a 29% decrease in its earnings per share.
However, thanks to the unprecedented fiscal stimulus packages offered by the government and the massive vaccine rollout, the economy is recovering strongly from the pandemic. As a result, the actual loan losses have turned out to be far lower than those booked last year and hence the bank has nearly returned to its pre-pandemic profitability.
The positive business momentum was confirmed in the latest earnings report of M&T Bank. Thanks to the recovery of the economy and the resultant reversal of a major portion of the loan loss provisions of the prior year's quarter, the company grew its earnings per share 34%, from $2.75 to $3.69. It is thus on track to grow its earnings per share 34% in 2021, from $9.99 to $13.38, which is only 5% below the pre-pandemic record level of $14.12.
M&T Bank has consistently grown its earnings per share. More precisely, it has grown its bottom line every year in the last decade, except for 2014 and 2020. On average, it has compounded its earnings per share at an 8.2% annual rate over the last decade.
Even better, the company has two major growth catalysts ahead. First of all, after 12 years of suppressed interest rates, the Fed is determined to begin raising interest rates in mid-2022. Higher interest rates provide a strong tailwind to banks, as they enhance the net interest margin, i.e., the difference between the interest charged on loans and the interest paid on deposits.
The economy has overheated lately, as evidenced by the steep increase in inflation. Consequently, the Fed is likely to deliver on its promise and raise interest rates at some point in 2022 in order to keep the economic growth under control. M&T Bank will greatly benefit in such a case.
M&T Bank also has another growth catalyst in place, namely its pending acquisition of People's United Financial (PBCT). As per the terms of the deal, the shareholders of People's United Financial will receive 0.118 shares of M&T Bank for each share they own and they will own only 28% of the combined company. The combined bank will be covering more than 20% of the U.S. population and more than 25% of the U.S. GDP.
People's United Financial is an exceptionally well-managed bank, which has consistently grown its earnings and has repeatedly proved resilient to recessions. To be sure, in 2020, which was marked by the fierce recession caused by the pandemic, People's United Financial posted a benign 8% decrease in its earnings per share. Even better, the bank is on track to post record earnings per share in 2021 while it also has an exceptional performance record, with 29 consecutive years of dividend growth.
It is also important to note that People's United Financial has more than 400 branches in the Northeast and has a market capitalization of $7.6 billion, which is 38% of the current market capitalization of M&T Bank. Therefore, it is evident that this will be a major acquisition for M&T Bank. Overall, the acquisition of People's United Financial is likely to prove a major growth driver for M&T Bank thanks to the high quality of the acquired bank and its size.
In the Great Recession, which was the worst financial crisis of the last 80 years, most banks cut their dividends but M&T Bank maintained its dividend. On the other hand, the company paid the same dividend for 8 consecutive years, from 2008 to 2016. Nevertheless, M&T Bank has resumed growing its dividend in the last four years.
Moreover, the stock is currently offering a 3.1% dividend yield. While this yield may not seem exciting on the surface, it is 2.5 times the current dividend yield of the S&P 500 and hence it should be attractive for income-oriented investors. Given also the healthy payout ratio of 32% and the promising growth prospects of M&T Bank, there is ample room for meaningful dividend raises in the upcoming years. It is also worth noting that M&T Bank recently raised its dividend by 9.1%. This is a testament to the ample room for dividend hikes and the confidence of management in the business outlook of the bank.
M&T Bank is currently trading at a price-to-earnings ratio of only 11.5. This is much lower than the historical 10-year average price-to-earnings ratio of 14.1 of the stock. As soon as interest rates begin to rise and the market appreciates the benefits from the aforementioned acquisition, the stock is likely to revert towards its historical valuation level. In such a case, the stock will enjoy a 23% tailwind (=14.1/11.5 -1) merely from the normalization of its valuation.
If the coronavirus mutates significantly and evades the vaccines, it may cause a significant setback to the economy. In the worst-case scenario, there will be another round of lockdowns, which will cause an increase in the loan loss provisions of M&T Bank.
However, vaccine producers have stated that they can easily adjust their vaccines for potential mutations, within just a few months. Moreover, now that nearly 60% of global population has received at least one dose of a vaccine, the odds of the above scenario have decreased. Even if a significant mutation shows up, vaccines will still offer some protection; they will not be useless.
Furthermore, most governments have shown reluctance to impose new lockdowns. To cut a long story short, it is extremely unlikely that we experience a worse year than 2020 in reference to the pandemic. Even in 2020, M&T Bank incurred a 29% decrease in its earnings per share but it remained highly profitable and endured the crisis easily. Overall, if the pandemic takes a turn for the worse, it is likely to exert temporary pressure on the stock of M&T but the bank is likely to recover even in such a scenario.
M&T Bank has rallied 22% in the last 12 months and hence it has become less attractive than it was a year ago. However, the stock remains cheaply valued, particularly given its promising growth prospects and the rich valuation of the broad market. Given also the generous dividend of the stock and the ample room for many more dividend hikes, M&T Bank is a great candidate for the portfolios of income-oriented investors.
This article was written by
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