A Bank That’s Wearing the Green

07/24/2008 12:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, likes a well-run bank based in what has been one of the world’s hottest economies.

Remember Michael Price, the portfolio manager of Mutual Shares? That value fund amassed a long-term track record that has probably not been matched in the last 20 years by more than a handful of money managers.

So, I was delighted to read that he was touting a stock I had my eye on. Price’s imprimatur gave me the impetus to push Allied Irish Banks, Plc. (NYSE: AIB) to the front of the line. The stock is down [nearly 40%] for the year.

The company’s crime is that it’s a bank. All banks are getting creamed this year because of subprime fears. But there are still banks out there with good lending practices and clean balance sheets that won’t need propping up.

Allied is a rare standout that has a great long-term track record, conservative lending practices, and miniscule subprime and derivative exposure. Nor are there any off-balance-sheet bombshells in the wings. The third parties in [special purpose entities Allied set up] have no recourse against AIB. Period. The total amount at risk for the company is the 39 million Euros it invested.

The company [should earn] around $6.00 per ADR, which you can get for [below $28]. The bad news is that earnings in 2009 are expected to be flat, due to economic weakness. That’s in contrast to the last five years during which Ireland’s GDP grew at 6% per year, and Allied Irish grew EPS at the rate of 23.4% per year.

Ireland’s economy is still among the most vibrant in the world, and operations overseas are growing at a respectable pace, too. At last year’s rate, the dividend should yield about 5.7% at today’s price. If the company boosts the dividend proportionately to this year’s increase in earnings, it could be more like 6.6%.

Here again, we have a stock that’s already had more than a bear market correction. This one has a high dividend, a solid balance sheet, and long-term growth superior to its peers. Does it have more downside left in a prolonged bear market? I don’t know; the market is never rational at times like these. But it seems extremely unlikely it has as much downside risk as the market does.

At some point, investors will start seeing the difference between our high-quality bank stocks, and the junk that’s deservedly been pummeled. Then we’ll see a strong rebound. In the meantime, it helps to remember that since 1900, 66% of the total return of the stock market was generated by dividends. The yields on our bank stocks are great.

The payout ratio is conservative—in the 50% range—so, I think there’s little chance the dividend will be less than last year’s. This holding fits comfortably into our high-income portfolio, while maintaining good long-term growth prospects. Allied Irish Banks is a buy up to $35.

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