A "Popular" Pick

10/01/2004 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

I've long been a fan of Horizon Publishing. Their Dow Theory Forecasts has been published for nearly five decades, while their DRIP Investor is the leading authority on dividend reinvestment plans. Both services recently featured a buy on a "popular" Puerto Rican bank.

"Popular (BPOP NASDAQ) is a popular stock for any type of investor," says Richard Moroney, editor of Dow Theory Forecasts. "Based in San Juan, Puerto Rico, Popular has nearly $40 billion in total assets, ranking it among the 30 largest bank holding companies in the US. Banco Popular de Puerto Rico, the company’s principal subsidiary and Puerto Rico’s largest financial institution with more than $20 billion in assets, has nearly 200 branches. Banco Popular North America, with more than $6 billion in assets, has more than 100 branches in California, Florida, Illinois, New Jersey, New York, and Texas. The bank generated 68% of 2003 revenue in Puerto Rico and 30% in the US.

"Due to the growing Hispanic population in the US, Popular plans to continue expanding via acquisitions. In March, the company agreed to acquire Quaker City Bancorp for $367 million in cash. Quaker City has 27 retail full-service branches in Southern California and total assets of $1.8 billion and deposits of $1.1 billion. In August, Popular agreed to acquire Kislak Financial, a private commercial bank in Florida, for $158 million in cash. Kislak Financial operates eight banking facilities in the Miami area and has $998 million in total assets and $708 million in deposits.

"Capitalizing on a leading position in Puerto Rico and expansion in the US, the bank has assembled an impressive track record. The bank’s per-share earnings have increased every year since 1991, with annualized growth of 13% over the past five years. Solid profit growth should continue, but concerns regarding a slowdown in mortgage lending have limited the stock’s valuation. At less than 14 times expected 2004 per-share earnings of $1.83, the stock trades at a discount to its peers.

"While rising interest rates could hurt Popular’s mortgage-lending business, higher rates should eventually boost the bank’s interest income. In the meantime, the company reports that demand for residential mortgages remains strong. In the June quarter, loans grew 18%, with mortgage loans up 31%. Commercial loans grew by 8% and consumer loans increased 16% as a result of strong marketing efforts. Asset quality continues to improve as low-risk residential mortgages make up a growing portion of the loan portfolio. Credit quality in commercial and construction lending is also improving. Popular has doubled its dividend since 2000 and increased it by 60% in the last four quarters. Currently yielding 2.6%, the stock offers an attractive combination of yield and appreciation potential. In the last six months, company insiders have purchased 185,000 shares. This steady buying by corporate insiders rounds out the stock’s appeal. Popular has good operating and stock-price momentum and is being upgraded to a Long-Term Buy."

Chuck Carlson, contributing editor to Dow Theory Forecasts and editor of The DRIP Investor, adds, "It stands to reason that if four different insiders are buying stock, that is a stronger signal than if just one insider is buying. One stock in our DRIP Investor Editor’s Portfolio that has seen its share of insider buying in recent months is Popular. Three different insiders purchased the stock in August. The stock, yielding 2.7%, represents a quality play in the banking sector. Popular’s direct-purchase plan permits initial investment with a minimum $100. The firm picks up all fees on the buy side. Also, DRIP participants receive a 5% discount on shares purchased with reinvested dividends. Since Popular is based in Puerto Rico, you will fill out additional tax-related forms when joining the DRIP. However, shareholder tax issues are fairly mundane and should not scare off an investor interested in the plan. Investors should note that the easiest and quickest way to obtain enrollment information is by going online to Popular’s Web site at www.popularinc.com."

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