The High-Yield Bank Better Than Warren Buffett’s Bank

Investors have generally treated bank stocks in 2019 as they would treat the neighbor’s kid: They have largely ignored stocks
We have one exception, and unarguably the most notable exception.
Warren Buffett has been adding bank stock shares to Berkshire Hathaway’s (NYSE: BRK.b) portfolio throughout the year.
Bank of America has been a conspicuous Buffett favorite.
The lumbering Charlotte-based behemoth recently disclosed that Berkshire Hathaway owns 950 million of its shares. That’s a hefty increase over the 896.2 million shares Berkshire reported at the end of the first quarter.
I see the attraction.
Bank of America appears bargain-priced. Its shares trade at 1.05 times book value and 10.8 times trailing-12-month earnings. Bank of America has performed well in recent history. Earnings per share (EPS) have doubled since 2015.
Buffett likes Bank of America, but I think we can do better.
I prefer People’s United Financial (NASDAQ: PBCT), a New England-based regional bank.
Perhaps Buffett would prefer People’s United, too, if its size were no impediment.
Bank of America sports a $262 billion equity market cap, which is 44 times People’s United’s $6 billion equity market-cap. A meaningful People’s United investment for Berkshire would mean owning the bank lock, stock, and barrel (even then, that wouldn’t be meaningful).
Size matters in bank stocks. People’s United’s size might preclude Buffett from buying its shares. It need not preclude us.
People’s United is the better value. Its shares trade at a 0.84 multiple to book value compared to Bank of America’s 1.05 multiple.
Starting dividend yield gives People’s United another one-up. Its shares are priced to offer a 4.7% starting dividend yield. Bank of America shares are priced to offer a 2.7% starting yield.
I think so highly of People’s United that I bestow it a “widow-and-orphan” rating.
Buy the shares and hold them in perpetuity without worry. All the while, benefit from a rising dividend stream.
History supports my contention.
In mid-2008, the financial sector was engulfed in a deflationary inferno. The once-reliable, rising dividend streams the big banks offered were no more.
All the big banks’ dividends evaporated to 15% of the pre-inferno stream. Bank of America’ stream evaporated the most, to a leaky-faucet 2% trickle.
Meanwhile, up in the great Northeast, the People’s United dividend continued to rise unabated.
Discipline is key to accumulating a record of long-term, continuous banking success.
People’s United loan volume and net interest income (NII) have more than doubled over the past 10 years. Nonperforming assets, on the other hand, have been halved.
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 will exploit an acquisition opportunity when it arises.
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. People’s United is as strong today as  any time in its history.
I estimate 2019 EPS of $1.38 (a 7% increase over 2018). Earnings growth will be driven by NII growth, nontraditional fee growth, and cost savings derived from acquisition synergies.
People’s United shares trade at 11.5 times trailing 12-month earnings. They usually trade at 18 times trailing 12-month earnings.
I see no reason People’s United should be trading at a steep discount to the historical norm.  Few banks can match its quality loan portfolio and business fundamentals (and that includes Bank of America).
Among bank stocks, Buffett prefers Bank of America. I prefer People’s United Financial. You make the call.

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