People's United: The Best Value Among Banks?

08/26/2019 5:00 am EST

Focus: FINANCIALS

Stephen Mauzy

Income-Investing Specialist, Wyatt Investment Research

We like People’s United Financial (PBCT); indeed, we’ll argue that it’s the best value proposition for income investments among all banks, asserts growth and dividend expert Steve Mauzy, editor of High Yield Wealth.

People’s United saw its shares trend lower over the past two months. We’re unfazed. Its share trade at 0.84 times book valueIts shares are priced to offer a 4.8% starting dividend yield.

We think so highly of People’s United that we rate it the only bank of “widow-and-orphan” quality: Buy the shares and hold them in perpetuity without worry, and all the while benefit from a rising dividend stream. 

History supports our contention. In mid-2008 the financial sector was engulfed in a deflationary inferno. It became immediately evident that bank executives were clueless on risk management. The once reliable, rising dividend streams the big banks offered were no more. The flow was reduced to a leaky-faucet trickle. 

While all the big banks squeezed their respective dividends to near nothing, People’s United was growing its dividend to reward its shareholders for their loyalty. It was business as usual. People’s United was doing what it had done for the 15 years before the crisis — increasing the dividend annually.

The key to successful banking is discipline. This means pricing services profitably, maintaining high underwriting standards, keeping customers happy, and controlling costs.

People’s United loan volume and net interest income (NII) have more than doubled over the past 10 years. The total loan volume grows, but the total of nonperforming loans shrinks. Nonperforming assets were halved over the past decade. Few banks operate under higher underwriting standards. 

Growth arises organically — through People’s United established bank network. It’s supplemented through timely acquisitions.

Though a conservative, risk-disciplined organization, People’s United is always ready to exploit acquisition opportunities when they arise. People’s United has acquired nine financial institutions over the past 10 years. The mix includes other banks, but also other financial businesses — insurance and wealth management. 

The acquisitions have helped People’s United grow its basic banking business. They have also helped diversify the overall business.

We estimate 2019 EPS of $1.38 (a 7% increase over 2018) and $1.48 in 2020. Earnings growth will be driven by NII growth, nontraditional fee growth, and cost savings derived from acquisition synergies. 

We still view our bank as the best bank in the country. People’s United shares trades at 11.2 times trails 12-month earnings. People’s United historically has traded at 18 times trailing 12-month earnings. Its shares trade at only 10.4 times EPS estimates for 2019. They trade at only 9.7 times 2020 EPS estimates. 

We see no reason People’s United should be trading at a discount to the historical norm. Few banks can match People’s United’s quality loan portfolio and business fundamentals (and includes Bank of America). When investors can buy quality at a bargain price, we see little reason not to buy.

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