CTBI - Community Trust Bancorp: 43 Straight Years Of Dividend Growth

2023-08-31 14:44:44 ET

Summary

• The Fed's restrictive monetary policy is causing bank funding costs to rise rapidly, weakening banks.
• Community Trust Bancorp is an attractive investment opportunity with a market cap of $646 million.
• The dividend is the strength of this bank.

The Fed's restrictive monetary policy is weakening banks, as it has caused bank funding costs to rise rapidly. However, it is in difficult times that the best investments are made, and today I would like to talk about Community Trust Bancorp ( CTBI ). This is a bank with more than 100 years of history but little known; in fact, it has a market capitalization of only $646 million.

We are not talking about the investment of a lifetime, but at the current price this bank looks attractive. In addition, its dividend is definitely something to consider.

Long-term and short-term performance

Before analyzing the fair value and dividend, I think it is useful to highlight the long-term and short-term performance that this bank has achieved.

With the exception of the period related to the great financial crisis, Community Trust has always maintained a double-digit ROE and EPS has grown steadily, albeit not in a linear way. The net income margin has been close to 40% in recent years, but the LDR has remained relatively low compared to its historical values.

In short, we are talking about a bank that has shown that it knows how to grow, but it is obviously susceptible to the performance of the business cycle. After all, all banks struggle during recessions. But there is more.

Both BV per share and TBV per share have shown continuous improvement over the past 20 years, even during the great financial crisis. The only time there has been a visible collapse is in the current macroeconomic environment, where interest rates have been raised very rapidly. This has generated significant unrealized losses for AFS securities with high duration; in the case of Community Trust they amount to $121 million, about 18 percent of equity. Anyway, time is a friend in this case, since the closer the securities get to their maturity, the smaller the unrealized losses become. In other words, rather than a permanent problem, the current book value is experiencing a temporary difficulty. Different discussion if the bank needs immediate liquidity and sells the securities at a loss, but there is no such risk at the moment.

Based on the latest quarterly report , let us now see what is happening today.

Compared with the first six months of last year, the net interest margin improved 23 bps and reached 3.42%. This is quite a positive result, considering that the average for banks of a similar size is 3.28%.

Such a result was aided by the significant weight of non-interest-bearing deposits, about 29% of total deposits. During the banking crisis at the beginning of the year, many banks saw their non-interest-bearing deposits plummet dramatically due to lack of confidence, but this was not the case for Community Trust.

Finally, Street estimates predict declining EPS through the end of 2024, probably due to the rising cost of deposits and the slowdown related to loan origination. In my view, the market has already discounted this scenario, but it has not discounted a recession scenario. As of today, there are many signs that do not rule it out entirely, above all the inversion of the yield curve and the U.S. LEI at worrisome levels.

In other words, I think the market has already discounted a turbulent short to medium-term future for Community Trust, but not that bad.

Be that as it may, even if there is a recession, it is certainly not the first one this bank has faced. It has always been able to weather them, and most importantly, management has the experience to handle it.

As can be seen from this image, those who are in a key role at Community Trust have decades and decades of experience. CEO Mark Gooch has worked for this bank for 42 years; in short, this is certainly not the first recession he will face.

Dividend analysis

One of the aspects that surprised me most about this bank is its dividend; in fact, for 43 years in a row the cash dividend has been increased. None of the countless recessions in nearly half a century-including the severe one in 2008-has jeopardized shareholder returns. It is uncommon to find a bank with this characteristic.

As we can see from this graph, diluted EPS has always covered the issuance of an increasing dividend, even at the most critical point of the great recession. Over time, EPS increased faster than the dividend, and this generated a lower payout ratio.

So, in light of this data, I consider this bank's dividend to be sustainable.

Currently, the dividend yield is also quite high, 4.90%.

There have been few times in the past 15 years when there has been an opportunity to buy this bank at such a high dividend yield, and it may be another few years before it reaches the current level again. Based on the dividend yield alone, it would seem an appropriate time to buy Community Trust.

Finally, I want to show you the dividend on cost and how continued dividend growth can impact this investment. By buying this bank in difficult times in the past, it has been a good strategy to get a fairly high dividend on cost today. The only flaw in the dividend is that although it is constantly increasing, the annual growth rate is rather low, 4.39% over the past 10 years.

Buying Community Trust today and assuming dividend growth is the same, in 10 years the dividend on cost will be 7.94%. Definitely not bad.

Valuation

Previously, we have seen how this bank looks undervalued based on dividend yield, but there are also other valuation metrics that tend toward this conclusion.

A P/TBV of 1.09x has been achieved a few times in the past 15 years; the historical average is 1.64x. Multiplying the latter figure by the current TBV per share of $33.06, the fair value amounts to $54.23 per share. Community Trust is currently trading at only $35 per share.

We also have a further sign of undervaluation by looking at the P/E, both TTM and FWD. This ratio is lower than both peers and the 5-year historical average.

So, in addition to the dividend, the current undervaluation seems to be an additional driver for investing in this bank.

Conclusion

Community Trust is not facing an easy time because of the rising cost of bank funding. In addition, unrealized losses are weighing on the BV, which is contracting sharply for the first time in 20 years.

It is not an easy time, but it is inevitable to face periods of contraction after a decade of expansionary monetary policy. Management has the experience to overcome even a potential recession, which is why I remain confident about the long-term trend. What's more, the net interest margin is still higher than that of peers.

The major valuation methodologies signal an undervaluation, and the high and sustainable dividend makes this bank even more attractive. For all these reasons, in my view, there is a case for a buy rating.

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