TFS Financial: What to do With Too Much Money?

11/14/2019 5:00 am EST

Focus: FINANCIALS

Michael Foster

Editor, BNK Invest

TFS Financial (TFSL) is a dividend grower that "breaks" most stock screeners because the company took advantage of a conversion, a financial event for small banks, explains Michael Foster, editor of Contrarian Income Report.

If you're not familiar with conversions, think of initial public offerings, or IPOs. In these events, private companies put their shares up for sale to the public for the first time and get cash back in return.

Conversions are similar, but some small private banks choose to go public in two steps instead of one. This means that in lieu of selling all shares to the public, they'll sell some in a "first step" conversion while keeping the rest in what's called a mutual holding company.

Several years later, the bank will complete the "second step" of the conversion and sell the mutual holding company's stake to the public.

TFS Financial is in between these steps, and it already has more money than it knows what to do with. So, the firm is hiking its dividend as fast as it can and buying back shares to boot.

The bank sold 31.7% of its shares to the public during its first step offering in 2007. Its mutual holding company kept the other 68.3%. Since then, it's repurchased nearly half of the minority shares it originally issued!

The big benefit? TFC only pays dividends to its minority shareholders. As a result, this bank is "overcapitalized" right now, which is a fancy way of saying it has too much money (nice problem, right?).

Well-capitalized banks boast capital-to-asset levels between 5% and 10%. TFS Financial sits at 12.2% and, remember, it has another ATM it will eventually tap in the future as the "second step" of its conversion (when it sells more shares to the public and raises even more money). TFS is rolling in dough and merely needs steady earnings to cash in on this dividend double.

Its most recent dividend raise of 8% took the stock's yield above 6% — an incredible dividend for a safe stock like this! Shares are beginning to move higher as investors finally uncover this hidden gem, but it should be only the start. We're up 13% in just six months including dividends. Buckle up, there's more to come.

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