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TFS Financial (NASDAQ: TFSL) is a share of the regional bank that I have mainly for its performance. I have it to serve as a fixed income alternative, as do many of its other holders. With the recent sale of bonds, preferred stock and other income investments, TFSL Actions have also been affected:
After recovering from the pandemic-induced losses in early 2021, stocks have almost returned to March 2020 lows.
As the stock price has been falling, the dividend yield has been rising. TFS has increased its dividend for seven consecutive years, so there has been an increase in dividend as well as an increase in yield, although the share price has fallen:
As long as TFS Financial is able to cover its dividend – which, as we will see in a moment that it can do so, the stocks are very attractive as a fixed income alternative to current prices.
TFS is a mutual portfolio company – this is why it matters
TFS Financial is a unique situation as it is a mutual holding company “MHC”. In an MHC structure, shares that have not yet been issued to the public are still accounted for as outstanding shares and therefore greatly dilute a company’s reported earnings and other financial indicators. The truth is that the vast majority of TFS and others MHC’s The reported “shares” don’t actually exist in any significant way, so the market limits, PE ratios, and all the other financial metrics you see in the filters are incorrect.
Fortunately, TFS management has begun trying to help the public understand real finance with useful slides in its latest quarterly earnings presentations:
Overview of TFSL actions (corporate presentation)
As the slide explains, the dividend goes only to minority shareholders. Thus, despite paying a dividend yield of 6.8% (now 8.3%), the company’s dividend was fully covered and then part of the net profit, with the payout ratio of 91% and the 70% of net profit for the last six months and tax. year, respectively.
In addition, TFS Financial has had incredible consistent results in recent years. These are the last five years of earnings per minority share:
- AF ’21: $ 1.51
- AF ’20: $ 1.57
- AF ’19: $ 1.52
- AF ’18: $ 1.61
- AF ’17: $ 1.64
There has been no growth to talk about, and the bank’s return on capital and net interest margins remain low. But when a bank can reliably earn around $ 1.50 per share per year and pay $ 1.13 of that earnings as dividends each year, it is still an attractive offer when the shares are they sell for only $ 13.50. This represents a dividend yield of 8.3% and a return of more than 10%.
Also, as the company explains on this slide, the true book value per minority share is now $ 33.43, which has increased considerably over the last decade. Dividend is not the only way to generate shareholder value.
As an additional point that speaks to the security of dividends, the company is capitalizing far beyond regulatory requirements. This gives TFS plenty of room to pay large dividends and / or continue to operate in its currently authorized share repurchase program, regardless of short-term volatility in earnings or overall market conditions.
Low risk safe operations
As mentioned, the big blow against TFS Financial is that it is not a particularly profitable bank. It gets an unattractive “NIM” net interest margin of 1.82% in the last quarter. This is well below your average regional bank, which would be closer to 3%. However, in return for low returns on their loans, TFS has an excellent quality book of loans.
The company’s cost of capital is also quite low, averaging just 1.0% last quarter.
Cost of TFS funds (Corporate presentation)
This is because it has a solid deposit base with a significant portion of its total deposits consisting of current and savings accounts that pay only 0.1% on average. Their CDs also offer only 1.1%. Company loans from other sources also cost just 1.5% overall, with even longer maturities available for less than 2%.
As for the assets in the equation, TFS faces some risk, as 36% of its loans are fixed rate mortgages with a maturity of 10 years or more. This is where TFS can hurt if rates appreciate significantly and stay high. However, 10% of their loans are fixed rate mortgages maturing in 10 years or less, and the other 54% of the loan book are adjustable rate mortgages, HELOC and ELOAN, which should have better mortgage profiles. profitability in a rising rate environment. .
It is also worth noting that 50% of the TFS loan book is in the state of Ohio. This means that TFS is less risky than if its loan portfolio were exposed to faster-growing housing markets with higher prices and levels of speculation.
In addition, TFS subscription is exceptionally conservative. During the last fiscal year, the new average TFS loan was for a borrower with a FICO score of 777 and with only a 59% loan at “LTV” value. It’s hard to imagine TFS losing a lot of money on these types of ultra-secure loans, no matter what happens in the real estate market in the short term. This is especially true when you lend 59% of the value to Ohio instead of a more speculative state.
Results of TFSL actions
Now, how do we get a stock price below $ 14 closer to book value or at least a more reasonable P / E ratio? The easiest option would be for the bank to convert to a regular structure, leaving the MHC behind, and then sell. The current CEO has said he does not want to become under his watch, but that he is coming of age. The bank could be on sale very quickly if it decides to retire.
Otherwise, the shares may increase due to their increasing book value. I think the shares should be trading closer to 65-70% of the book value to account for the MHC discount, which would place the shares around $ 22. At this price, it would still offer a dividend of more than 5%, giving enough incentive for yield investors to stay.
That said, stocks have reached convincing levels of value here as they continue to fall. With the generous dividend of this exceptionally conservative and tasteless bank now surpassing 8%, this is a fantastic income share. I also expect a significant appreciation of the stock price once the current bloodbath in the fixed income market finally ends.