Dividend Analysis - Wachovia Corporation (NYSE:WB)
23 August 2007Since financials seem to be some of the best bargains at the moment, I thought I would look at another bank - Wachovia Corporation - which trades on the NYSE under the symbol WB. Another big dividend payer to add to our portfolio of superior dividend yielding stocks? Let’s find out.
Company Profile:
From Yahoo Finance
Wachovia Corporation operates as a bank holding company. It engages in capital management, the general bank, wealth management, and the corporate and investment bank businesses. The company provides various commercial and retail banking, and trust services through full-service banking offices in the United States. It offers checking, savings, check card, foreign currency, annuities, life insurance, brokerage account transfers, CAP accounts, individual retirement accounts, credit cards, home equity, mortgage, hazard and flood insurance, escrow, taxes, private mortgage insurance, education loans, online services, online banking, online bill pay, and online brokerage services. The company also provides various other financial services, including mortgage banking, investment banking, estate planning, investment advisory, asset management, credit and debit card products, trust services, charitable services, mortgage banking, asset-based lending, leasing, insurance, and international and securities brokerage services.
Market capitalization is $94.58B.
Company Fundamentals:
As usual, I like to assess management’s performance by looking at the return on invested capital and the return on equity.
Management has produced a fairly low ROIC of 5.1% over the last 5 years. Last year’s ROIC was 3.74%. This is inline with banks such as Washington Mutual, but lower than other banks such as US Bancorp.
Return on equity has been trending downwards. The 10 year average ROE is 13.51%. The 5 year average ROE drops to 12.99%. Fairly consistent, but not producing the 20% ROE that was attained back in 1998 and 1999.
On the other hand, the equity growth rate has been trending higher. The 9 year rate is 8.97%. That increases to 11.36% over the last 5 years. The 3 year rate is 12.79% and last year’s equity growth rate was 19.87%.
Earnings per share growth rate has been interesting due to 2 monster years in 2001 and 2002 where the equity growth rates were 126% and 82% respectively. Therefore it shows quite the performance metrics in the 6 year period. The 9 year rate is 6.66%. The 5 year rate soars to 22.10% (thanks in part to the performance in 2002). The 3 year rate drops to 11.1% and last year’s EPS growth rate was 12.77%. You can see it trending higher if you take the 5 year average out of there.
Sales growth rates hae been incredibly steady at around 14% over the 10 year period.
So far, the fundamentals look good.
Dividend Fundamentals:
The current dividend yield is a nice, juicy 4.55%. That is on par with all the other banks but significantly higher than the S&P 500 Index (2.03%) and the DJIA (2.39%).
Now, the dividend growth rate concerns me. In 2001, the dividend was cut in half! I definitely don’t like to see that! That cut seriously affected the longer term growth rates. The 9 year dividend growth rate is a mere 2.84%. Now, the 5 year rate avoids that 50% decrease (which happened in 2001) and so the dividend growth rate is 19.65%. The 3 year rate is 19.35%. And last year’s dividend growth rate was 10.31%. Other than 2000 where the increase was 2.13%, the 50% decrease in 2001 and the 4.17% increase in 2002, the yearly increases have been excellent. But that worries me about management’s commitment to increasing dividends.
The dividend payout ratio sits at 45.73%. However, it has bounced around rather dramatically over the last 10 years.
Cash flow growth rates have been erratic. The 9 year rate is 2.88%. The 5 year rate jumps to 14.41%. The 3 year rate drops down to 4.84%. And last year’s cash flow growth rate was -2.68%.
Valuation Model:
I use 3 models to determine a fair price for a dividend yielding stock.
From a dividend yield perspective, you would think that this must be an all time high dividend yield. In fact, the 10 year average high dividend yield is 4.47%. So, yes, it is above the average, but just slightly. If we demand 4.47% yield, then our model price is $50.09. At the current price of $49.24, Mr. Market is currently offering a slight discount of 1.7%.
Mr. Benjamin Graham would argue that the discount is much larger! The Graham number is $62.95 which means a discount of 21.78%!
For my discounted present value model, I used the following inputs:
- future EPS growth rate of 8.7% (my initial forecast was 8.97% which was derived from the 9 year equity growth rate but the analysts have forecast a more conservative 8.7%)
- future P/E of 10.24 (the current P/E which is lower than the historical average)
- dividend yield of 4.47%
- future dividend growth rate of 10.31% (last year’s dividend growth rate which is more conservative than the 5 year average)
With this information, my model price works out to $53.77. Now, in order to get the 4.47%, I will not be willing to pay any more than $50.09. But it shows that both these methods are in sync.
Compare my WB calculations with yours.
Here is the 1 year stock price chart:
As you can see, there was a beautiful entry point during the peak of the current market correction.
Conclusion:
The cut in dividend back in 2001 really takes this stock out of play for our portfolio of superior dividend yielding stocks. We can get the same yield and dividend growth rates from other banks that have better histories of dividend growth.
As to the amount of sub prime exposure at Wachovia, I am not sure that they divulged that information as of yet. But no matter, I would prefer other banks such as C, BAC, USB and WFC.
Full Disclosure: I do not own shares in WB.
Popularity: 10%
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on August 23rd, 2007 at 9:53 am
Thanks for the review. I wonder how do you vote on these articles? I see the vote on the bottom of the post but don’t find a place to vote.
On WB cutting the dividend I would agree that is of note but in fact any of the company’s may cut the dividend if the circumstances demand it. I know we want consistent and growing dividends but in a major downturn it may happen. I hope they are now structured to avoid a repeat unless the world is caving in. The other numbers look pretty good though I would agree that BAC and USB look better but still have some interest in WB. You did not mention that they have just raised their dividend by 14% so it is close to 5% at current share price.
on August 23rd, 2007 at 9:14 pm
Hi Robert,
The popularity isn’t something that you vote on. Actually, it keeps track of how many views a post receives, and comments, trackbacks, etc… and calculates a popularity value for the post. You can then see my most popular posts in the right sidebar.
As for the dividend, Yahoo Finance indicates a dividend of $2.24 which is the dividend I used in my calculations.
on August 23rd, 2007 at 9:41 pm
I’d love to see a write up on
Corus Bank shares if you could fit it in. I’m sure you get lots of requests given the current nose dive in financials!
Thanks,
Brian
on August 23rd, 2007 at 10:15 pm
Hi Brian,
I will definitely add Corus Bankshares (CORS) to my list of stocks to analyze.