CTBI - Community Trust Bancorp Is A Buy Around Its 10-Year Lows

2023-06-02 09:26:15 ET

Summary

• Community Trust Bancorp's stock price has declined 26% this year, but the bank remains resilient thanks to its conservative and disciplined management.
• The bank has grown its dividend for 42 consecutive years and is offering a 10-year-high dividend yield of 5.2%, with a solid payout ratio of 38%.
• Community Trust Bancorp is trading at a 10-year low price-to-earnings ratio of 8.1, which is much lower than the 10-year average of 12.4 of the stock.
• Despite potential risks from a prolonged recession or further financial turmoil, Community Trust Bancorp's defensive business model is likely to endure downturns and recover strongly.

In early 2021, I recommended buying Community Trust Bancorp (CTBI), as I was expecting the bank to recover strongly from the pandemic thanks to its rock-solid business model. My thesis materialized sooner than I expected, with the stock posting a 20% rally within less than two months from my article. However, the stock has plunged 26% this year, along with the stocks of all regional banks, due to the collapse of Silicon Valley Bank, Credit Suisse and First Republic. The ongoing financial turmoil has hurt the stocks of all regional banks, but Community Trust Bancorp has proved resilient to all kinds of downturns thanks to its conservative and disciplined management. As its business has remained unaffected, its stock price is likely to recover strongly whenever the turmoil subsides.

Business overview – resilience

Community Trust Bancorp is a regional bank with 84 branches in Kentucky, Tennessee and West Virginia. It is the second-largest bank in Kentucky, with a market capitalization of $622 million.

The key differentiator of Community Trust Bancorp from most other regional banks is its exemplary management, which follows a conservative business model. Thanks to its robust business model, the company has proved essentially immune to all recessions. In the Great Recession, which was the worst financial crisis of the last 90 years, most banks incurred severe losses and cut their dividends, whereas Community Trust Bancorp remained highly profitable and kept growing its dividend.

The resilience of Community Trust Bancorp to downturns was evident throughout the coronavirus crisis as well. Due to the fierce recession caused by the unprecedented lockdowns in 2020, most banks incurred a sharp decrease in their earnings in that year. On the contrary, Community Trust Bancorp reported just an 8% decrease in its earnings per share in 2020. Even better, the bank recovered swiftly from the pandemic, with record earnings in 2021 and almost record earnings in 2022.

Moreover, Community Trust Bancorp has remained unaffected by the ongoing financial turmoil, which has affected some regional banks. In the first quarter, the bank grew its net interest income 10% over the prior year’s quarter, thanks to much higher interest rates. However, the steep increase in interest rates raised the cost of deposits as well. Consequently, the earnings per share of the company slipped 3%. Nevertheless, a 3% decrease in earnings per share off a nearly all-time high level amid adverse business conditions is certainly a testament to the defensive business model of the bank.

It is also important to note that Community Trust Bancorp has striking differences from the regional banks that recently collapsed. Not only did Community Trust Bancorp avoid a decrease in its deposits, but it also saw its deposits grow 2% during the first quarter. In addition, the bank does not have wholesale funding and its net loan charge-offs have averaged 0.03% of the total loan portfolio during the last 12 months.

Moreover, the company has an exceptionally high capital ratio of 13.7%, which is much higher than the required 9.0%. Furthermore, Community Trust Bancorp recently confirmed that it has ample liquidity and hence it does not need to resort to capital raises or liquidation of part of its investment portfolio, in contrast to the regional banks that recently went bankrupt. All the above facts confirm that Community Trust Bancorp is entirely different from the banks that were recently rescued. Therefore, investors should rest assured that this high-quality regional bank will easily endure the ongoing financial turmoil.

Growth

Community Trust Bancorp has grown its earnings per share by 6.4% per year on average over the last decade and by 9.5% per year on average over the last five years. Thanks to the unprecedented fiscal stimulus packages offered by the government in response to the pandemic, the bank posted record earnings per share of $4.94 in 2021.

Due to the fading tailwind from the fiscal stimulus packages, the company incurred a 7% decrease in its earnings per share last year, but it still posted the second-best earnings in its history. Analysts expect a further 7% decrease in earnings per share this year, from $4.58 to $4.23, due to the economic slowdown caused by the multi-year-high interest rates and the increased cost of deposits.

However, this level is still higher than the pre-pandemic earnings per share of $3.64, which the bank posted in 2019. Even better, whenever the economy recovers, the bank is likely to return to its long-term growth trajectory thanks to customer growth and strong long-term economic growth in its markets. It is also important to note that the stock has declined much more than its earnings, and hence its valuation has become exceptionally attractive.

Valuation

Due to the indiscriminate sell-off of all regional banks, Community Trust Bancorp is currently trading at a 10-year low price-to-earnings ratio of 8.1. This earnings multiple is much lower than the 10-year average price-to-earnings ratio of 12.4 of the stock. Given the consistent growth record of the company and its impressive resilience to downturns, its current valuation is undoubtedly attractive. Whenever the ongoing financial turmoil subsides and market sentiment becomes normal again, the stock is likely to revert to its average historical valuation level. In such a case, the stock will enjoy a 53% valuation boost in its returns (=12.4/8.1 - 1). Overall, Community Trust Bancorp is exceptionally cheaply valued right now.

Dividend

Thanks to its prudent management, which is focused on achieving sustainable, long-term growth of earnings, Community Trust Bancorp has an outstanding dividend growth record. To be sure, the company has raised its dividend for 42 consecutive years.

Moreover, thanks to its remarkably cheap valuation, the stock is currently offering a 10-year-high dividend yield of 5.2%.

The bank has grown its dividend by 5.6% per year on average over the last five years and has a solid payout ratio of only 38% . Thanks to its low payout ratio and its proven resilience to downturns, the company is likely to continue raising its dividend at a decent pace for many more years. Overall, investors are given a rare opportunity to lock in a 10-year-high dividend yield of 5.2% from this reliable dividend growth stock.

Risks

A potential risk factor is the event of a prolonged recession. In such a case, Community Trust Bancorp may be unable to grow its earnings for a considerable period, and thus its stock price may remain under pressure for an extended period. On the bright side, this bank has repeatedly proved resilient during recessions. Therefore, in the adverse scenario of a severe recession, the shareholders of the bank will only need to be patient.

The other potential risk factor is the scenario of a great deterioration of the ongoing financial turmoil. It is not unreasonable to expect a few more regional banks to face liquidity issues. However, even in such a scenario, Community Trust Bancorp is extremely conservative, with market-leading capital ratios and loan charge-offs. Therefore, the company is not likely to face any liquidity issues.

Final thoughts

Due to the indiscriminate sell-off of all regional banks, Community Trust Bancorp is trading at a 10-year low valuation level and is offering a 10-year-high dividend yield. The bank has repeatedly proved its defensive character throughout its 120-year history, and hence it is likely to endure the ongoing downturn without any problem. Whenever the market sentiment improves, the stock is likely to offer excessive returns to its shareholders off its nearly 10-year low current price.

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