2 Bank Stocks for Dividend-Seekers
We examine the capital adequacy and the solvency of the U.S. financial system.
|Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
Eric Compton: Today, bank valuations are about as cheap as they have been since 2008. With lower valuations come higher dividend yields but also more implicit risk, which begs the question, “Are bank dividend yields worth it today?” The current situation is unprecedented in many ways. We’ve never really been in an environment where we have willingly shut down 30% of the economy, where GDP could drop as fast as the current estimates suggest, and where unemployment has spiked so high, so fast.
Today's debate is not about earnings per share; it is about the capital adequacy and the solvency of the U.S. financial system. While there are many unknowns and the risks are real, we believe the banks are ready for almost any hit to capital. Our base case is that the U.S. economy and financial system will eventually emerge intact after COVID-19. As such, we think it is appropriate to view the banks as undervalued, and we believe there are opportunities within bank dividends today.
Our current top dividend pick among the money center banks is Wells Fargo. The bank has a dividend yield of over 7%, which suggests higher risks, but the bank has one of the more conservative underwriting cultures under our coverage. The bank typically does better than peers on stress tests and has the lowest capital requirements among the G-SIBs and also the most excess capital. As such, we think the dividend is currently safe for Wells, even though its dividend yield is materially higher than peers.
Our top pick among the regionals is Truist Financial. While the bank’s dividend yield of roughly 5% isn’t the highest under our coverage, we calculate that the dividend should be safe. The bank has a strong earnings stream to help support the dividend, and if you include the unamortized loan marks on the bank’s loan book, a result of the recent merger between BB&T and SunTrust, Truist has the largest reserve coverage among the banks we cover, as compared to the most recently available stress-test data. As such, we believe the bank should be able to sustain its dividend through the current downturn.
Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.