Bank of Hawaii Corporation (BOH) is a 120-year-old bank providing a broad range of financial products and services to in Hawaii, Guam and other Pacific Islands, notes Ingrid Hendershot, money manager, value investor and editor of Hendershot Investments.
Bank of Hawaii is the second largest bank in the state with $17 billion in assets. It operates in a unique competitive landscape where the top four banks control more than 80% of the regional market, providing the bank with a sticky, low-cost deposit base that reduces its sensitivity to pricing pressure as interest rates rise.
In addition to its low-cost deposit base, Bank of Hawaii is a low-cost operator, evidenced by its 2017 efficiency ratio (non-interest expense divided by total revenues) of 55.7%, which places it among the country’s most efficiently run banks. The conservatively-managed bank maintains a pristine balance sheet with solid asset quality and robust liquidity and capital levels, far exceeding regulators’ requirements.
During the past five years, Bank of Hawaii has banked profitable growth with revenues compounding 4% annually, net income growing by 5% annually and EPS increasing at a 6% annual pace. During the period, average loans and leases have increased at a 12% annual clip to $9.3 billion while average deposits have grown by 6% annually to $14.5 billion.
Return on average equity averaged a profitable 15.2% over the last five years. Credit quality steadily improved with non-performing loans declining over the past five years from $40 million to $16 million.
Since becoming a public company in 1972, Bank of Hawaii has paid uninterrupted quarterly dividends to shareholders increasing at a 3% annual pace during the past five years. During 2018, Bank of Hawaii increased its dividend twice to $2.48 per share with the dividend currently yielding a solid 3.1%. Management remains committed to returning cash to investors in excess of that needed to fund operations.
Indeed, Bank of Hawaii’s strong year-to-date free cash flow of $187 million enabled it to return nearly $140 million to shareholders through dividends of $73 million and share repurchases of $67 million at an average cost of $84.03 per share. Since 2001, the company returned a total of $2.14 billion to shareholders through share repurchases at an average cost of $38.92 per share with $52.1 million remaining under the current authorization.
General economic conditions in Hawaii remained positive during the third quarter of 2018. Total visitor arrivals increased 7.2% while total visitor spending increased 8.8%. The statewide unemployment rate was 2.2%.
Investors banking on attractive longterm returns should consider Bank of Hawaii, a high-quality market leader with an efficient cost structure, profitable growth and growing dividends. Buy.
