Citi and Country: Picking Bank Stocks
J.B. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Instead of simply hiding out in an exchange-traded fund, which mitigates much of the risks associated with picking individual stocks, a much better method for selecting banking stocks is to offset risk by investing in a regional company and a global company. There are positives and negatives to both types of stocks, but if you are smart and choose wisely, the rewards may significantly outweigh those gained from investing solely in exchange-traded funds.
So, for this plan to work, you have to select a regional bank. Two banking stocks that are appealing for long-term investors are U.S. Bancorp (NYSE: USB) and BB&T (NYSE: BBT). So, what’s so great about U.S. Bancorp? They paid dividends throughout the financial crisis; they currently are paying around 19 cents per share per quarter. They have a lower PE ratio than the average industry and sector PE ratio. Even though they fell short on revenue, missing Wall Street’s expectations, they did post a 5.2% increase in earnings for the final quarter of 2012. And finally, given their brand and strategy, they handily beat mega-banks like Bank of America when it comes to customer service.
However, BB&T offers a few more things than U.S. Bancorp. The upside potential is something that should always be front and center. U.S. Bancorp’s ten-year high is $37.99 a share, and it is currently trading between $32-$34 a share. BB&T’s ten-year high is $44.03, and it is currently trading between $27-$33 per share. If you go off the high of those current trading ranges, U.S. Bancorp has 17% upside to its ten-year high from here, while BB&T has 33% upside to its ten-year high from here. BB&T also pays a slightly higher dividend; they currently are paying around 23 cents per share per quarter. BB&T’s dividend was also recently increased by 15%, which bodes well for the stock price. In the fourth quarter of last year, earnings increased by 29%, and BB&T also reported record net income for 2012. Finally, they are thinking of the stockholders by growing the company and increasing the dividend, recently having acquired BankAtlantic and its $3 billion in core deposits, boosting its presence in the Miami area.
The Global Banks
So, to offset the risks a regional bank poses, such as regional economic slowdowns, it is a wise strategy to pair this investment with an investment in a global bank. Citigroup (NYSE: C) fits this bill because it will eventually start paying “significant” dividends again, and it has been largely overlooked by yield-hungry investors. Citigroup has also had a remarkable change in its strategy since Vikram Pandit departed and Michael Corbat took over as CEO. The stock price has risen significantly since October 16, 2012, the day Pandit resigned, running from $37.25 all the way to $42.20, a 13% jump. The stock will probably rise even higher if the restructuring strategies implemented by Corbat succeed. For instance, what will they do with the money saved from the 11,000 people they let go at the end of 2012? Another very shrewd move by Corbat was his highly publicized meeting with regulators. This action sent up a clear signal that said “we are cooperating; we have nothing to hide.” Buying back shares and raising the dividend will happen slowly and gradually. It will be baby steps for the time being. If you buy into the story of Corbat at this point, you need patience.
The Bottom Line
In two to three years, more investors will be looking forward to 2017 rather than backward at 2008. Now is as good a time as any to invest in banking stocks, given where these companies are headed. BB&T has 33% upside before it hits its all-time high again. And Citigroup has a long way to run before it trades for what it is actually worth in relation to its book value.
jbinvests has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup Inc . 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!