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number cruncher

What are we looking for?

U.S. banks reported not long ago, with some boosting dividends and buying back shares in response to their success in clearing this year’s stress tests by the Federal Reserve. This was generally well received by the market and perhaps aided in the July rally. As a result, my team member Allan Meyer and I thought we would take a closer look at U.S. banks using our investment philosophy based on safety and value. This sector often fits well with many of the qualities we admire when investing.

The screen

We started our search by looking at the financials sector (subsector banks) in the S&P 500. Then we looked at market capitalization as a safety factor; larger companies tend to be more stable and liquid. The accompanying table is sorted from largest to smallest.

Dividend yield is the annualized projected dividend divided by the recent share price. Dividends can reflect safer and steadier earnings profiles. Debt-to-equity is our final safety measure: It is the total debt outstanding divided by shareholders’ equity. A smaller number is desired. As we like to say, it’s difficult to declare bankruptcy if you have little to no debt obligations.

Price-to-earnings is the recent share price divided by the projected earnings per share. It is a valuation metric – the lower the number, the better the value. Earnings momentum is the quarter-over-quarter change in annualized earnings, a predictor of potential earnings growth and dividend hikes over the long term (or vice versa). Price-to-book compares the recent share price to the book or equity value per share. This is another valuation metric, and a lower number is preferred. Return on equity is a profitability ratio (net income divided by shareholders’ equity), and a higher number is better.

We’ve also calculated the average and median for all metrics to allow for better comparability and provided the 52-week total return to track performance.

What we found

U.S. bank stocks compared using safety and value

COMPANYTICKERMKT. CAP. (US$ BIL.)DIV. YLD. (%)DEBT TO EQTY. (%)P/EEARNS. MOM. (%)P/BROE (%)52W TTL. RTN. (%)RECENT PRICE (US$)
JPMorgan Chase & Co.JPM-N335.43.5182.99.5-7.51.219.0-22.3114.21
Bank of America Corp.BAC-N270.92.6183.69.6-0.61.012.2-9.433.71
Wells Fargo & Co.WFC-N165.12.7104.09.5-11.80.910.6-3.243.54
Citigroup Inc.C-N100.63.9231.97.4-3.90.511.5-20.651.92
US BancorpUSB-N70.63.977.810.0-4.11.516.0-10.847.51
PNC Financial ServicesPNC-N68.33.655.310.6-8.01.410.8-5.9166.06
Truist Financial Corp.TFC-N66.74.158.29.5-6.31.111.9-3.950.30
M&T Bank Corp.MTB-N31.02.719.710.5-17.81.210.435.9176.09
First Republic BankFRC-N29.20.711.217.74.11.810.0-15.8162.38
Fifth Third BancorpFITB-Q23.43.556.78.7-5.31.211.7-2.634.13
Regions Financial Corp.RF-N19.73.813.18.8-7.51.213.214.021.12
Huntington BancsharesHBAN-Q19.34.737.59.10.01.17.9-0.413.35
Citizens Financial GroupCFG-N18.64.429.87.9-16.30.810.0-6.737.58
KeyCorpKEY-N17.14.373.57.9-7.71.216.0-3.018.29
Signature BankSBNY-Q11.51.29.27.810.31.412.9-18.5183.27
Comerica Inc.CMA-N10.23.535.48.3-5.51.615.218.977.77
Zions BancorporationZION-Q8.23.025.78.4-12.91.314.37.153.93
AVERAGE74.53.370.99.5-5.91.212.6-2.8
MEDIAN29.23.555.39.1-6.31.211.9-3.9

Source: Refinitiv Eikon & Wickham Investment Counsel Inc.

Citigroup Inc. is the least expensive on both value measures (P/E and P/B), while Signature Bank has the lowest leverage/debt and best earnings momentum. Huntington Bancshares Inc. has the highest yield. All three look interesting under our safety and value lens. JPMorgan Chase & Co. is the largest bank by market cap and the most profitable (highest ROE).

In general, the sector has nice dividend yields, low debt levels, and inexpensive valuations, but the recent earnings momentum is a bit on the weak side. Perhaps it’s just a blip.

BMO Equal Weight U.S. Banks Hedged to CAD Index ETF (ZUB) is an option for investors who like the sector but prefer to diversify away individual security and currency risk.

Investors should contact an investment professional or conduct further research before buying any of the securities listed here.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

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