No Bargains in Bank Stocks Yet
Financial companies' dividend yields are high and share prices are low, but it's still too dangerous to jump into this sector. Maybe in a few months.
The best time to buy bank stocks "is in the middle of a recession" when "the last foreclosed property is sold." So says Anthony Polini, a Raymond James analyst who has followed the sector for 20 years.
So, despite falling stock prices and a growing list of announcements by banks of large write-offs against their assets, says Polini, it's too early to declare that there are bargains among busted bank stocks.
T.J. Marta, economic and fixed-income strategist for RBC Capital Markets, is even more negative -- and he works for a bank. Marta says times were so good so long for financial institutions that they got sloppy and failed to set aside adequate reserves to cover what are now "cascading" losses from failed mortgage securities and other funky investments.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Are there still other shoes to drop? He thinks so. Buy bank stocks soon? "No," says Marta.
But before you dismiss bank stocks out of hand, what about the fabulous dividend yields? Instead of the usual 3%, many are yielding more than 5% and, in some instances, more than 6%. We're talking about big banks that look solid, have enviable growth records and many sources of earnings, and raise dividends steadily.
Look at Wachovia (symbol WB), which helped trigger a market-wide selloff fueled on November 9 after it announced a $1.1 billion write-down of some mortgage-related investments. In August, when the stock was at $49, Wachovia increased its dividend 14%, to $2.56 a year.
The stock closed at $42.35 on November 14, down 3.2%, and now yields 6%. By comparison, a ten-year Treasury note yields 4.3% and a good five-year CD pays 5.1%.
In normal times, Wachovia shares -- after losing 25% in a month -- would be a screaming buy. After all, what's $1 billion? Wachovia has $68 billion left in shareholders' equity (surplus of assets over liabilities).
Just too unsettled. Maybe the stock market is a tad less panicked about banks and financial firms. The 300-point rally of November 13 lit up when Goldman Sachs (GS) and, later, Bank of America (BAC), said their mortgage-asset troubles were manageable.
Bank of America disclosed an impending $3 billion write-down, but that still leaves it with $132 billion in equity on its balance sheet. And the bank earned $3.6 billion in the quarter that ended in September. The prospect that Wachovia or Bank of America are in enough trouble that either could be forced to cut dividends -- or worse -- is remote.
Then again, analysts and stock traders don't think these are normal times. Their mistrust of bank and securities-firm shares now stems from how Wall Street hates to be blindsided about bad assets.
Plus, big investors expect more worrisome announcements, including shocks from banks not normally associated with big risk-taking. There are also rumors that some financial firms will have to shore up their money-market mutual funds to prevent them from losing money -- known in industry parlance as "breaking the buck."
All bank stocks, even unlikely ones, are therefore under a cloud. BB&T (BBT), a regional bank that operates from Maryland to Florida from a base in North Carolina, is an example. It seems far removed from the origins of the crisis. BB&T hasn't had to take a charge against its assets (at least not yet). It wants to make loans, not cut back on them, but perhaps the demand is flagging.
BB&T said in early November that its key business of lending to local and regional real estate developers is slowing and that its subprime car loan business is down because of the loss of construction jobs. BB&T's big insurance brokerage business is also weak. It's impossible to be bullish.
But is this justification for the shares plunging 20% since early October? BB&T is still earning enough to easily cover the payouts to the shareholders. And high dividends are in its DNA. John Allison, the chairman and CEO, says "75% of our shares are owned by individuals who like dividends."
BB&T, which closed at $35.45 on November 14, down 0.8%, yields 5.2%. It sounds like a good buy, if not a screaming one. But just not yet.
That's because there are other troubles for banks and bank investors besides subprime securities and asset write-offs. If the economy slides toward a recession in a few months, bank profits will suffer because of reduced loan volume, fewer mortgage origination fees, declining income from credit cards and home equity lines, and a higher percentage of loans in delinquency.
You'll get your dividends, but no capital gains and possibly losses. And while it helps bank earnings when the Federal Reserve cuts short-term interest rates while longer-term rates remain the same, the Fed isn't going to ease as dramatically as it did in the last economic downturn.
Most of all, financial stocks are deeply out of favor. It will take time, as it did with technology stocks a few years ago, before major investors stop avoiding or dumping financials at any sniff of trouble. Yields could go higher as share prices fall further. "Wachovia at 6.5% could be Wachovia at 7.5% if you wait a little while," Polini says.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
Five Ways to Make Retirement a Little Less Scary
To avoid lying awake at night once you’re retired, consider having these strategies in place before you take the plunge.
By Evan T. Beach, CFP®, AWMA® Published
-
With Irrevocable Trusts, It’s All About Who Has Control
An irrevocable trust must be carefully funded, structured and managed to achieve both asset protection and tax planning.
By Rustin Diehl, JD, LLM Published
-
Stock Market Today: Markets Soar Amid Strong Earnings for Big Tech
Equities ended the week on an up note thanks to some of the market's biggest names.
By Dan Burrows Published
-
Stock Market Today: Markets Tumble Amid Slower Economic Growth and Rising Prices
Disappointing readings on GDP and inflation helped tank equities.
By Dan Burrows Published
-
Stock Market Today: Stocks Run Out of Steam Ahead of Meta Earnings
The Dow Jones Industrial Average snapped a four-day winning streak after Boeing's first-quarter results.
By Karee Venema Published
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
Stock Market Today: Markets Rebound Ahead of Big Week for Earnings
Equities rallied on easing geopolitical tensions, upcoming quarterly results.
By Dan Burrows Published
-
Stock Market Today: Nasdaq Spirals as Netflix Nosedives
A big earnings boom for credit card giant American Express helped the Dow notch another win.
By Karee Venema Published
-
Stock Market Today: S&P 500, Nasdaq Extend Losing Streaks
The two indexes have closed lower for five straight sessions.
By Karee Venema Published
-
Stock Market Today: Dow Slips After Travelers' Earnings Miss
The property and casualty insurer posted a bottom-line miss as catastrophe losses spiked.
By Karee Venema Published