Dividend Analysis - Fifth Third Bancorp (NASDAQ:FITB)
20 July 2007Continuing on our quest to find superior dividend yielding stocks, today I will analyze Fifth Third Bancorp which trades on the NASDAQ under the symbol FITB. Like many bank stocks, FITB offers a very rich dividend yield of 4.15%.
Company Profile:
From Yahoo Finance
Fifth Third Bancorp, through its subsidiaries, operates as a diversified financial services company. Its Commercial Banking segment provides traditional lending and depository products and services; and offers a range of other services, including cash management, foreign exchange and international trade finance, derivatives and capital markets, asset-based lending, real estate finance, public finance, commercial leasing, and syndicated finance for large and middle-market businesses, governments, and professional customers.
FITB has a market capitalization of $22.06B and employs over 21,000 employees.
Company Fundamentals:
First off, I like to see how well management is performing by checking both the return on invested capital and the return on equity.
For the return on invested capital, I was only able to obtain the 5 year average ROIC of 7.30% and the ROIC is 2006 of 5.26%. All the banking stocks seem to deliver these low ROIC numbers.
The return on equity numbers are much, much better. The 10 year average is 17.26% and the 5 year average is 17.03%. Strong and consistent return on equity. Total debt is 63% of their capital.
Equity growth rate has been declining as of late. From the 9 year equity growth rate of 11.96% down to the 5 year equity growth rate of 6.12% where it has remained consistently.
Now, earnings per share growth rate is rather disturbing. Over the 10 year period, the EPS growth rate is a very respectable 9.84%,. However, the 5 year rate is NEGATIVE! And last year’s EPS growth rate was the worst yet at negative 21.58%. In fact, the last 3 years have all reported negative EPS growth rates.
And this is highly linked to the sales growth rate. Over the last 3 years, the sales growth rate has been 1.2%, 1.53% and negative 8.85%! That is atrocious compared to the average of 17.99% over the last 10 years.
From just looking at the fundamentals, I would not consider investing in this stock.
Dividend Fundamentals:
As I stated at the beginning, FITB is offering a healthy dividend of 4.15%. That dividend yield blows away the dividend yield on the S&P 500 index and the DJIA. However, all the banks are paying in this range, so it is not out of the ordinary.
Now, the dividend growth rate has been spectacular over the last 10 years at 17.32%. However, it has been declining significantly and last year’s dividend growth rate was a rather mundane 8.22%.
And I can understand why they have slowed their growth rate. Their dividend payout ratio is currently at 72.48%! Over the last 10 years, it has grown from a conservative 33.57% to today’s high. Not sure how much more room there is to move on that dividend payout ratio.
Valuation Models:
So far, the company fundamentals and the dividend fundamentals have pretty much sealed the deal for me. But let’s check the valuations on this stock.
From a dividend yield perspective, the 5 year average high dividend yield is 3.13%. So that would imply that FITB is trading at a fairly large discount. However, just over the last 2 years, the average high dividend yield has been 4.17% and 4.41% respectively. So in that respect, the current 4.15% is right about on par.
Calculating the Graham number, I came up with a model price of $29.78 which translates into a premium of almost 36% to today’s price of $40.50.
For my discounted present value method, I used the following inputs:
- future EPS growth rate of 6.12% (although analysts have forecast 10%, I am going by the historical equity growth rate that has been delivered by FITB)
- future P/E of 12.23 (typically, investors are only willing to pay a P/E that is double the future EPS growth rate)
- dividend yield of 3.13% (the 5 year average high dividend yield)
- future dividend growth rate of 8.22% (based on last year’s dividend increase since it has been declining steadily)
With these inputs, my model price works out to $18.01. My lowest valuation yet and leads to a premium of 124.86%!
See my calculations here.
The one year stock price chart follows:
Conclusion:
I would not consider this a candidate for my dividend portfolio. Although the dividend yield is juicy today, and will continue to support these high valuations, I do not feel that FITB will be able to continue to increase their dividends at their current pace. The fundamentals just don’t show it. That may lead to the stock moving sideways for quite some time.
Full Disclosure: I do not own any shares in FITB.
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