Thursday, June 14, 2012

Bought 100 PBCT at $11.47

I have an unusually large cash allocation at the moment. I am not pleased with the near zero return on that stash. It was certainly easier to hold a large cash allocation in 2007 when money market rates were over 5% (e.g Vanguard Prime Money Market was 5.12% in June 2007 and .04% now).

My displeasure is aggravated and enhanced by a realization that no return is likely on money market mutual funds for at least another two years. Given that large cash allocation earning nothing, I feel obligated to take some measured risks to generate income. The purchase of PBCT last Tuesday is just one way among many to generate some income without taking an inordinate amount of risk. For me, the risk of holding PBCT is substantially reduced since I have zero situational risk. I can hold the stock through its up and down moves, for as long as necessary, but I would hope  to harvest a decent total return in a 1 to 3 year time period.

Sterling Bancorp Trust I 8.375% Cum. Trust Pfd. Secs (STL.PA) and AAG Holding Company Inc. 7.50% Sr. Deb. due 11/5/33 (GFW) were ex interest for their respective quarterly distribution yesterday. I own 200 shares of both. STLPRA is unusual for a TP in that it has a $10 par value. GFW is a baby bond with a $25 par value.

Ares Capital (own) was ex dividend yesterday for its quarterly distribution of 37 cents per share. Adjusted for the ex dividend, the shares rose 6 cents to close at $15.22.

The Nuveen Build America Bond Fund (NBB) was ex dividend yesterday for its monthly distribution.

Moody's downgraded Spain's debt by three notches to Baa3 from A3.

I am busy on another matter so this post will only discuss one purchase from Tuesday.

1. Bought 100 PBCT at $11.47 Last Tuesday (Regional Bank Basket Strategy)(see Disclaimer): Considering what happened to bank stocks during the Near Depression and its immediate aftermath, People's United Financial performed admirably during that period. The bank raised its dividend, as other banks slashed their distributions. While earnings fell in 2008-2010, the bank remained comfortably profitable. The bank earned $150.7 million, or 52 cents per share, in 2007. Net income fell to $137.8 million in 2008 and $101.2 million in 2009, 2010 Annual Report at page 21

People's currently operates 361 branches in New England. About People's United A recent Investor Presentation contains a number of easily understood charts and graphs. 

PBCT is well capitalized. As of 3/31/12, the holding company had excellent capital ratios:

For the Q/E 3/31/12, PBCT reported an E.P.S. of 17 cents per share, up from 15 cents in the year ago quarter. The company reported for this last quarter an efficiency ratio of 63..2%; an operating net interest margin of 4.01%; and a return on average tangible assets of .93 (prefer over 1). Form 10-Q at page 47 Originated non-performing loans stood at 1.67% of originated total loans. 

The current quarterly dividend is 16 cents per share. The dividend yield at that rate would be approximately 5.58% at a total cost of $11.47 per share. In today's world, that looks good to me. 

The stock has a four star rating by Morningstar. Their fair value estimate is $14, and I do not have a quarrel with that number in about a year or maybe two. I would be more than satisfied to sell the stock at $14 after harvesting several dividends. 

The current consensus estimate is for a 2012 E.P.S. of 77 cents and 90 cents in 2013. PBCT Analyst Estimates Provided PBCT can hit or exceed that 90 cent number in 2013, with no adverse warnings about 2014, a $14 per share price tag would be doable in late 2013 or early 2014. I would give this bank a slight premium valuation to its peers based on its dividend yield, good capital ratios, and a successful navigation of the Near Depression period. All of those positives indicate to me a conservatively run financial institution.  

A two year chart reveals a surge to over $14 back in January 2011, and a couple of moves up to $13.5 in 2012. Starting last April, when the stock traded near $13.50, the price slid to its current daily range of $11.40 to $11.5. Back in March 2009, the stock was trading much higher, mostly in the $16 to $18 range. The shares held up remarkably well during the Near Depression, PBCT Interactive Chart 

I have owned this stock in the past, but this is its first addition to the regional bank basket strategy. I decided to pull the trigger after its recent 15% or so slide in price. 

In today's world, a 8% total annualized return would probably prove to be exceptional over the next few years, probably over the next decade. A stock like PBCT can give me about 5.58% from the dividend, provided it is maintained at its current level. Another 2.5% annually could be achieved with relatively small stock increases. A sell at $14 after the brokerage commission would generate about 22%. If that return on the shares could be captured at anytime between 2013-2015, I would categorize this investment as successful. 

Between 1/1/98 through 12/31/11, the annualized return for the S & P 500 with dividends reinvested, and adjusted for inflation which was very modest during that period, was 1.21%. Annualized Returns of the S&P 500

People's United Financial closed at $11.5 yesterday, up 2 cents per share. 

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