Dividend Analysis - Washington Mutual Inc (NYSE:WM)
5 July 2007Today, we will be analyzing a stock with a nice, big, fat juicy dividend yield - Washington Mutual Inc. It trades on the NYSE under the symbol WM and currently has a dividend yield of 5.04%!
Company Profile:
From Yahoo Finance
Washington Mutual, Inc., together with its subsidiaries, operates as a consumer and small business banking company in the United States. It operates in four segments: Retail Banking, Card Services, Commercial, and Home Loans. As of December 31, 2006, the company operated 2,225 retail banking stores and 472 lending stores and centers in 36 states.
This is a large cap stock with a market capitalization of $38.54B.
Company Fundamentals:
Unfortunately, I wasn’t able to find long term return on invested capital numbers, but the ones I did find are rather disappointing. The 5 year average ROIC is 5.10% and last year’s ROIC in 2006 was 3.42%.
Return on equity was much more impressive. The 10 year average is 15.98% and the 5 year average is slightly lower at 14.76%. ROE is trending downwards. In 2006, the ROE was 11.03%.
I think the name of this fundamental analysis should be ’spiraling downward.’ And that is exactly what the equity growth rate has been doing from a 9 year average of 15.07% to last year’s low of 2.11%.
Earnings per share growth rate is sticking to that slogan as well. Over the 10 year period, the EPS growth rate was 13%. The 5 year average goes at negative 1.54%. And last year’s beats that mark at negative 17%. Ouch.
Sales growth rate? No surprise. Over 10 years, almost 34%. Over 3 years, 1.19%. Last year, 1.75%.
Dividend Fundamentals:
Going from one of the lowest dividend yields I have ever seen, to one of the highest dividend yields at 5.04% for Washington Mutual Inc.
And the dividend growth rate? Yup. Spiraling downward. Actually, the first 8 years had rock solid dividend growth rates in the 17-18% range if not higher. But the last 2 years have come in below 10% (9.20% and 8.42% to be precise).
And no, I don’t want to say it. Just have a look at the cash flow growth rates (Psst. Negative 33% last year!).
Dividend payout ratio is quite high at 66%. It was just 27% back in 2002. How quickly it has climbed.
Valuation Models:
At a dividend yield of 5.04%, you can guess that it is on the high side of the average high dividend yield. In fact, the 5 year average is 4.61%. So with that, the model price should be 47.68. At the current price of $43.68, that is a discount of 8.40%.
The Graham number comes out to $43.93. That is almost dead on the current price but is still a discount of 0.56%.
For my last valuation method, I need a few numbers:
Future P/E: I will use the 5 year average of 11.44 because it is the most conservative estimate.
Future EPS Growth rate: My initial estimate was 10.74% (5 year average). The analysts have come in at 10%. But looking at the last few years, I think that is too high. I am going to pull it down to 8%.
Dividend Yield: I expect to continue to earn my 5.04% yield that I would purchase at.
Future Dividend Growth Rate: This is a tough one. I want to use last year’s growth rate of 8.42%. But with the fundamentals, I am wondering if there will be any more dividend growth. Let’s give management the benefit of the doubt. They have consistently been raising dividends, so let’s use last year’s growth rate.
With all these numbers, my model price comes to $36.54 which implies a premium of 19.55%.
Check out my calculations.
Conclusion:
The fundamentals are all spiraling downwards. Not the kind of trend a long term investor wants to see.
All 3 valuation methods do in fact have the stock selling at a reasonable price.
What are your thoughts?
Full Disclosure: At the time of this writing, I do not own any shares in WM.
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on July 10th, 2007 at 5:24 pm
Dividend payout ratio of 66% may be misrepresenting the fundamentals a bit. A large portion of WAMU’s net income is not even cash earnings but instead just negative amortization interest accruals to the Option ARM loan balances.
If you focus instead on the actual cash earnings, the dividend payout ratio over the past few quarters has been higher than the cash brought in, with WAMU borrowing or selling assets to pay for the dividend, or worse still, spending down existing cash reserves on the dividend when it should be held as reserves in preparation for potential hardtimes ahead in the loan market.
Full disclosure: Short WAMU