UMBF - UMB Financial - Solid Performance And A Great Dividend History

2023-07-28 11:54:19 ET

Summary

• UMB Financial Corporation reported EPS in line with expectations and has a solid dividend yield.
• UMBF has a strong track record of dividend growth and is not overleveraged.
• The company operates in the regional banking industry and has three segments: Commercial Banking, Institutional Banking, and Personal Banking.

Introduction

The very recent report that came out from UMB Financial Corporation ( UMBF ) showed EPS come along the expectations for the quarter, at $1.93 per share. The company has had its share price plummet over the last months as the regional bank's meltdown earlier had a severe impact on the sector. The question about banks' actual liquidity levels and security arose, but I think UMBF is among the better options right now. The valuation is below the sector and the dividend yield is decent too.

The loans saw a decent rise in the last quarter and this led to UMBF now having gross loans of $22.5 billion. This has netted them an ROE of 12.56%. For the investor that wants a dividend addition that has a fantastic track record of growing it and isn't overleveraged with an outrageously high payout ratio then right now, UMBF is looking very solid. This concludes my rating it a buy right now.

Company Structure

UMB Financial has been in the sector ever since 1913 which is its founding year. The headquarters lie in Kansas City and has built up a national presence in the United States. Building on what they have made UMBF has turned into a very solid dividend income company that is steadily growing it and not risking overleveraging. For 21 consecutive years, the dividend has been raised.

As for the industry the company is in, we can box it in with regional banks, an industry that saw a lot of turmoil earlier on in the year. They were two notable banks that went under and this caused a chain reaction in the industry that dragged down the share price of many, UMBF included.

Within UMBF there are three various segments , these are as following: Commercial Banking, Institutional Banking, and lastly Personal Banking. The first segment of the business focuses mostly on providing clients and customers with commercial loans, credit cards, and real estate financing. Moving to the second segment, Institutional Banking offers asset management and various healthcare services too. But the company has also diversified, and this segment now also includes alternative investment services and underwriting. Lastly, the Personal Banking segment generates its revenues from deposit accounts and retail credit cards but also from private banking.

Seeing as interest rates have been rising since the FED recognized the dangers of inflation and that it is no longer transitionary but rather sticky. There is a quite high likelihood of us having to endure a higher interest rate environment. This wouldn't be the worst possible thing as being invested in UMBF during this period will likely yield decent returns. In a market such as this UMBF thrives and the ROE sits at the highest level in the past 5 years, at 12.56%.

Earnings Transcript

The earnings from UMBF came out very recently and the Q2 report showed strong results as the average loans increased by 17.3% on a linked-quarter, annualized basis. This is showcasing strength and momentum in a still uncertain and difficult market. Deposit balances also increased to $33.5 billion and helped result in a stronger ROE for the quarter.

But, from the earnings call, there were some very worthwhile comments from the management team that helped shed some light on the results and how their operations have been going. The CEO Mariner Kemper said the following.

As noted in our last call, the deposit pricing pressures the industry is experiencing is not dissimilar to the price of commodity or raw materials for other industries. As other industries would, we are reacting to our cost of raw materials by pricing our products for this environment. As we have noted, 62% of our existing loans also reprice with movements in rates.

This comment highlights some of the likely volatility that UMBF could see in earnings. Not every quarter perhaps, but on a yearly depending on how the interest rates set by the FED are developing. This makes it important for UMBF to manage its portfolios efficiently to maintain strong ROE.

If you look at our 20-year history, ending with the full year of 2022 our annual losses have averaged just 29 basis points and our 10-year average was 26 basis points. What makes it even more impressive is that over these periods, we have enhanced our reach and footprint through market and vertical expansion and are generally a more complex organization. We've achieved this through our focus on risk management and with a consistent approach that comes from having the same team. Our allowance to loan coverage ratio further increased 2 basis points sequentially to 99 basis points of total loans a level we believe to be prudent.

This comment here is highlighting the fact that UMBF has been able to operate at very solid levels in the difficult market environment. In a palace with higher rates, I think UMBF is ripe to report solid QoQ growth numbers going forward.

Valuation & Comparison

As for my GGM model for UMBF, it comes out that to receive a required rate of return of 10% one would need to buy at $38 or under right now, a number that is far too low ever be reached I think. Looking as to why UMBF is still spelling I think we need to highlight the dividend a bit more.

Dividends being raised for 21 consecutive years paints the picture here that shareholders are valued by the management and future raises to it are likely to happen. This paired with the fact UMBF is trading below its historical p/e by nearly 30% and the loans and deposit portfolio is growing nicely makes for a decent buy case here.

Investor Takeaway

Consistency and reliability are key components when finding a long-term addition to a portfolio. Right now I think UMBF is ticking those boxes. The company has a fantastic history of raising its dividend. Besides that, the market position of the company is broad and in the face of rising interests still, there is a strong likelihood of growing earnings I think. The fact UMBF is also trading below historical averages helps a buy case even more. What investors need to watch out for is the ROE as a direct reflection of the future potential dividend raises. But with 12.56% in Q2 of 2023, UMBF presents itself as very good right now. Concluding this article, I am rating UMBF a buy.

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