Is Truist Financial Stock a Buy After Dividend Hike Announcement? (NYSE:TFC)
Truist Financial Corporation (NYSE: TFC) is a United States-based superregional bank that offers a range of services and products to its commercial and retail customers. The company also stands out for its insurance (a top 7 global player) to both groups of customers.
TFC has more than 2,500 offices and is considered the seventh largest commercial bank in the United States. It has also developed a strong presence in its main markets, as evidenced by the fact that it is among the top 3 banks in 17 of its 20 main markets (Florida and Georgia are the 2 main markets contributing jointly to 41% of TFC deposits).
Is the dividend profile of Truist Financial good?
Late last month, Truist announced that it would increase its quarterly dividend (subject to board approval) by 8.3% to 0.52 per share (this would come into play in the third quarter) . While this isn’t some kind of bargain and is lower than the average 10% hike advertised by other banks in this space, I still think it should be well considered given the circumstances.
First, it is better than the 6.66% increase observed last year. Also, looking at YCharts’ estimates for FY22, this would imply a forward annual dividend payout rate of 45%, which is much better than the typical 30% payout rates seen in the banking sector. Importantly, also consider that due to merger-related developments related to the acquisition of Kensington Vanguard and a rally in risk-weighted assets, TFC’s CET-1 ratio of 9.4% (in Q1 -22) was below the bank’s previously announced target of 9.75%. In light of these conditions, one could have been forgiven for expecting that no dividend growth materialized!
So what gave TFC the confidence to pull off a high single-digit dividend hike? Well, for that, you have to give the company credit for holding up reasonably well to the US Fed stress test. Although its CET-1 ratio of 9.4% is lower than the previously announced internal target, in the Fed’s severe downside scenario it is still 2,500 bps (excess capital) above the minimum requirement of 7% from the Fed (including a 2.5% crisis capital buffer). The other important point to note is that this specific stress buffer figure of 2.5% has been maintained for TFC for another year (from October 1 for one year); not all banks have been able to maintain the same SCBs; for example, Citi Bank will see a 4% higher SCB from last year’s 3% level.
Furthermore, under the Fed’s extremely adverse scenario, TFC’s loan loss rates are not expected to increase and would be maintained at 5.7% for another year; it’s quite different from most other super-regional peers. The 5.7% figure is also the lowest among all other major super-regional peers (loan loss rates for super-regional banks average 7.4%).
While these recent stress test results have improved TFC’s payout profile, there’s structurally a lot to like about TFC’s dividend position. A quarterly dividend of 0.52 per share would result in a strong forward yield of nearly 4.4% at current prices. That’s better than what’s typically found in this industry (3.3-3.5%), and it’s also significantly better than TFC’s own historical average of around 3.5%. TFC’s dividends are also quite reliable as they have maintained it for almost a quarter of a century (whereas most peers in this space have only been doing so for 13 years)
What to expect from the upcoming second quarter results?
Truist Financial Corporation will also announce its Q2-22 results on July 19 and hopes to make up for a relatively disappointing performance in Q1-22 where it failed to meet expectations for the first time in 11 quarters. Just for some historical context, adjusted revenue was down 4.4% and was worse than management’s forecast of a 1-2% decline. Failing to meet first-quarter expectations may explain why a confidence deficit has opened up and why current consensus revenue expectations for FY22 (2.56%) are still below the forecast of the direction of annual growth of 3 to 4%.
Nevertheless, for the second quarter, analysts still expect negative revenue growth, albeit at a much weaker level of -0.5%. The GAAP EPS Q2 figure is expected to reach 1.06, implying earnings growth of -9%.
At first glance, despite some rather disappointing numbers, there are some nuances worth watching. NII weakness likely bottomed in Q1 and the coming quarters (Q2 onwards) will reflect sequential improvement even as the Fed continues to tighten aggressively. A gradual ramp-up of 100 basis points could increase TFC’s NII by 4.3%, while in a shock scenario it could increase by 7.9%. While April’s 50 bps rise was in line with expectations, it’s fair to say that June’s 75 bps rise was unexpected, so we could potentially expect some upside surprises with the NII .
Weak non-interest income was one of the shocks in the first quarter and investment/dealing banking, in particular, proved worrisome, down 31% sequentially and 25% sequentially. % on an annual basis. I don’t think Q2 will see the same level of weakness here and management had also signaled a healthy order pipeline at the end of Q1; nonetheless, TFC hopes to offset any weakness here with continued momentum in insurance revenue which was up 16% in the first quarter.
Another area where we could see significant improvement is in operating costs and leverage. For the uninitiated, TFC is realizing an additional $500 million in cost savings related to its long-term plan to achieve $1.6 billion in annualized cost savings by the end of FY22. So far, while most of the adjustments related to branches and FTEs have already been made, there are still developments related to the dismantling of various data centers and applications. Expect progress here in the second quarter as they plan to reduce their data centers and applications by 50% and 30% respectively before the end of the year.
What are some of the risks associated with the TFC story?
While still a tiny number, TFC’s net charge-off ratio (NCO based on loans) of 0.25% leans towards the top of the peer range of 0.1% to 0.28%. This will only worsen to levels of 0.3-0.4% in the future.
TFC also has a high exposure to C&I loans (commercial and industrial) which represent the largest share of its total loan portfolio (47%). Some components of recent US composite PMI readings point to weak appetite for upcoming lending; new orders recently fell for the first time in two years. It’s a shame, because industry-wide C&I lending in the US only recently experienced positive growth after 13 consecutive months of negative or no growth!
TFC’s non-interest revenue component, a notable contributor to pre-provision earnings, has declined sequentially since peaking in Q2-21. Expect these pressures to continue due to lower mortgage refinancing activity and the advent of the Truist One checking account which was introduced in the second quarter, which will see overdraft fees eliminated altogether.
Final Thoughts – Is TFC Stock a Buy, Sell or Hold?
Some promising aspects of the TFC stock are worth considering; NII weakness has bottomed out and will only improve from there, merger integration costs will decline and operating leverage will manifest in H2-2022. I also explained how the consensus is currently a bit conservative with respect to management guidelines and there is potential for upside revisions here, which could prove to be a useful catalyst. Next, while I’ve already touched on TFC’s heartwarming dividend profile, don’t forget the buyback angle either. TFC has an ongoing $4.2 billion buyout plan set to expire in three months; by the end of Q1-22, they had only used 38% of that war chest, so there is plenty of ammo left to support the stock price.
The evaluation image doesn’t seem too prohibitive either. TFC is currently trading at a forward P/E of 9.56x, which is 12% cheaper than the stock’s long-term average of 10.83x. TFC’s forward P/E multiple is also lower than most of its other superregional peers, including Wells Fargo (WFC), US Bancorp (USB) and PNC Financial Services (PNC), all of which trade at P /E two digits. .
From a futures price to book value perspective, the valuation angle is equally compelling, with TFC trading at a 12% discount to its long-term average of 1.21x, and a discount of 8% compared to the average of the super-regional set of 1.15x.
On the standalone TFC chart, the bears have had the upper hand for most of 2022, but are showing strong selling in March and April, we have now seen a series of pin candles (long wicks), indicating some support for the trend. buying around the lower levels at $47.
Also consider that TFC offers a decent risk/reward ratio compared to the vast US regional banking space. Compared to the iShares US Regional Bank (IAT) ETF, the relative strength of TFC stock is closer to levels last seen during the 2009 GFC crisis.
All things considered, at current price levels, I would say TFC stock is a BUY.