CPF - Central Pacific Financial: High Dividend Yield But Hawaii's Mixed Economic Outlook Will Keep Earnings Flattish
Summary
- Loan growth will likely slow down due to elevated runoffs in the consumer portfolio and a negative outlook for the residential mortgage segment.
- Margin growth will likely significantly slow down in 2023 because of a worsening of the deposit mix.
- The December 2023 target price suggests a high upside from the current market price. Further, CPF is offering a high dividend yield.
Earnings of Central Pacific Financial Corp. (CPF) will likely be flattish this year. Loan growth will likely be lower this year relative to last year due to certain headwinds in Hawaii’s markets. Further, the growth in net interest margin will be lower this year due to a deterioration of the deposit mix. Overall, I'm expecting Central Pacific Financial to report earnings of $2.66 per share for 2023, down by just 1% year-over-year. The year-end target price suggests a high upside from the current market price. Therefore, I'm adopting a buy rating on Central Pacific Financial Corp. stock.
Loan Growth Likely to be Below Average This Year
Central Pacific Financial Corp.'s loan portfolio grew by 9.1% during 2022, in line with the historical trend. The management expects loan growth to slow down in 2023 partly because of a planned runoff of unsecured consumer loans from the mainland USA. The management mentioned in the conference call that it’s expecting loan growth for 2023 to be in the mid-single-digit range only.
Central Pacific Financial's business activities are primarily focused on Hawaii with around 83% of all loans based in the state. Moreover, around 67% of the loan portfolio consists of real-estate-related loans. As a result, the health of Hawaii's residential and commercial real estate markets are key factors driving the company's product demand. Like the mainland, Hawaii's house prices shot up over the last couple of years, denting affordability. However, the trendline has started to flatten of late.
High mortgage rates will also continue to hurt home affordability. Overall, I believe the outlook for the residential mortgage loan demand is currently worse than in previous years. Further, the employment situation in the real-estate segment provides cause for concern as it doesn't appear to have fully recovered from the pandemic.
On the plus side, broad-based macroeconomic metrics like the overall unemployment rate and the coincident economic activity index for Hawaii appear promising.
Moreover, recovery in the tourism industry is going remarkably well. According to official sources , the number of visitors in January 2023 was up by 37.9% from a year ago period.
Considering these factors, I'm expecting the loan portfolio to grow by 5% in 2023, as shown below. Further, I'm expecting deposits to grow in line with loans.
| Financial Position |
| FY18 |
| FY19 |
| FY20 |
| FY21 |
| FY22 |
| FY23E |
| Net interest income |
| 173 |
| 184 |
| 198 |
| 211 |
| 216 |
| 238 |
| Provision for loan losses |
| (1) |
| 6 |
| 42 |
| (15) |
| (1) |
| 7 |
| Non-interest income |
| 39 |
| 42 |
| 45 |
| 43 |
| 48 |
| 47 |
| Non-interest expense |
| 135 |
| 142 |
| 152 |
| 163 |
| 166 |
| 181 |
| Net income - Common Sh. |
| 59 |
| 58 |
| 37 |
| 80 |
| 74 |
| 73 |
| EPS - Diluted ($) |
| 2.01 |
| 2.03 |
| 1.32 |
| 2.83 |
| 2.68 |
| 2.66 |
| Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
My estimates are based on certain macroeconomic assumptions that may not come to fruition. Therefore, actual earnings can differ materially from my estimates.
CPF is Trading at a Large Discount to the Year-End Target Price
Central Pacific is offering a dividend yield of 4.6% at the current quarterly dividend rate of $0.26 per share. The earnings and dividend estimates suggest a payout ratio of 39% for 2023, which is below the five-year average of 48%. Therefore, there is room for a dividend hike this year. To remain on the safe side, I’m not projecting any increase in the dividend in 2023.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Central Pacific Financial. The stock has traded at an average P/TB ratio of 1.34 in the past, as shown below.
| FY19 |
| FY20 |
| FY21 |
| FY22 |
| Average |
| TBVPS - Dec 2023 ($) |
| 17.7 |
| 17.7 |
| 17.7 |
| 17.7 |
| 17.7 |
| Target Price ($) |
| 20.2 |
| 22.0 |
| 23.8 |
| 25.6 |
| 27.3 |
| Market Price ($) |
| 22.4 |
| 22.4 |
| 22.4 |
| 22.4 |
| 22.4 |
| Upside/(Downside) |
| (9.8)% |
| (1.9)% |
| 6.0% |
| 13.9% |
| 21.8% |
| Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 11.4x in the past, as shown below.
| FY19 |
| FY20 |
| FY21 |
| FY22 |
| Average |
| EPS 2023 ($) |
| 2.66 |
| 2.66 |
| 2.66 |
| 2.66 |
| 2.66 |
| Target Price ($) |
| 25.1 |
| 27.8 |
| 30.4 |
| 33.1 |
| 35.7 |
| Market Price ($) |
| 22.4 |
| 22.4 |
| 22.4 |
| 22.4 |
| 22.4 |
| Upside/(Downside) |
| 11.9% |
| 23.7% |
| 35.6% |
| 47.4% |
| 59.3% |
| Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $27.1 , which implies a 20.8% upside from the current market price. Adding the forward dividend yield gives a total expected return of 25.5%.
The large difference between the current market price and the target price shows that investors have overreacted to the prospects of flattish earnings this year. In my opinion, this discount is unwarranted. Based on the total expected return, I'm adopting a buy rating on Central Pacific Financial Corp.
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Central Pacific Financial: High Dividend Yield But Hawaii's Mixed Economic Outlook Will Keep Earnings Flattish