Is People's United Wasting Your Money?
Dec 4th 2012 12:57PM
Updated Dec 4th 2012 1:02PM
Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.
But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use the announcement as a reason to buy by itself, rather use it as a launching pad for additional research.
Easy money, hard times
The Federal Reserve's easy money policies continue to weigh down bank performance. With the artificially low interest rate environment we're in, homeowners are encouraged to refinance their higher rate mortgages, but the prepayments sink banks because better, more profitable loans are swapped out for less profitable ones.
Huntington Bancshares saw its net interest margin decline year over year because of a 10 basis point decline in the yield on earnings assets, while Hudson City Bancorp also said its yields on mortgage-related assets decreased last quarter. With the Fed extending its ruinous "Operation Twist" program through the end of the year, we'll see more and more banks suffering from the same malaise.
Connecticut savings and loan operator People's United Financial was another financial institution caught in the Fed's vice, despite reporting generally positive results in the third quarter. While operating earnings were in line with analyst expectations and $0.04 per share above last year's efforts, they slipped a penny from the second quarter as it suffered from "repricing pressure" in its loan portfolio. That would be mortgage holders refinancing their loans.
Despite the harsh environment the government forces it to operate in, People's still shows it's on a sound financial footing. Earlier this year, it increased its quarterly dividend to $0.16 a share, while over the first three quarters of the fiscal year, it repurchased $165 million worth of stock. Continuing that drive to return value to shareholders, it recently announced it would authorize the buyback of up to 10% of the bank's outstanding stock, or as many as 33.6 million shares.
Operating primarily in Connecticut, People's United is the state's largest bank by deposits, behind Bank of America and Webster Financial , but it has expanded its footprint by acquiring 57 branches from Royal Bank of Scotland's Citizens unit New York to join acquisitions it made in Boston and on Long Island.
The announcement of the buyback may temper People's buying binge. At the end of last year, it held off on buying back any stock, so analysts were anticipating it may make acquisitions. While New Jersey's Hudson City was considered a prime candidate, along with Astoria Financial , People's went a different route to expand its New York presence.
By broadening its depositor base to strengthen its balance sheet and cutting costs to increase recurring operating revenues, People United seeks to continue on the path of strong cash generation capabilities. But financial markets remain in turmoil, not least because of the looming fiscal cliff. And with the Fed persisting in causing uncertainty, margins that are already under pressure are likely to remain so. Investors will likely be well-served, then, by the bank's plans to buy back its stock.
At 18 times earnings and just under 15 times estimates, People's finds itself fairly positioned among its peers. Astoria also trades at 18 times trailing earnings, while First Niagara goes off at 17 times. Flagstar Bancorp trades at 15 times earnings. Thus I find myself agreeing with the Fool's Kyle Vaughn that People's will be able to "continuously increase its payout to shareholders while generating the capital to expand and develop its operations."
Let me know in the comments section below if you agree that this savings and loan will be able to fight the Fed and return value to shareholders.
Take that to the bank
With big finance firms still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal, or whether finance stocks are a screaming buy today. The answer depends on the company, so to help figure out whether Huntington Bancshares is a buy today, I invite you to read our premium research report on the company today. Click here now for instant access!
The article Is People's United Wasting Your Money? originally appeared on Fool.com.Rich Duprey has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and Huntington Bancshares. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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