In April, when we purchased southeast regional bank Synovus Financial (SNV), we pointed to CEO Kessel Stelling as a big reason why we liked the firm, recalls Brett Owens, editor of Contrarian Income Report.
Kessel was a regional manager during the 2008 financial crisis. It was then that he learned to be sympathetic to folks who wanted to repay their debts but simply couldn’t (due to job losses or businesses closures).
He decided to work with them, rather than simply get their loans off the books (which is what investors and regulators wanted.) Kessel was later appointed to the CEO position, where his “kind capitalist” approach benefited Synovus two-fold.
First, it forced the company to hang onto its undervalued assets while their prices recovered. Second, its “crisis compassion” grew goodwill with its local customers and communities during the firm’s own time of need. These warm feelings translated into two of our favorite things: profits and payouts.
Fast-forward to 2020, and Kessel’s previous experience couldn’t be more on point. Yet Wall Street, obsessed with spreadsheets and algorithms, overlooked the human leadership component. We were able to snag Synovus at just 67% of book value (which means we were buying the bank for below its liquidation value).
Buying a bank for less than book is as close to “free money” as it gets on Wall Street. I noted that when we’re able to buy stocks for this cheap, we don’t even need “good news” to send the share price higher. Mere “ho hum” news can be plenty to get the share price rolling higher.
And that’s exactly what we got from Synovus recently when Kessel & Co. took the microphone for the firm’s earnings call. Chief Financial Officer Jamie Gregory reiterated that the company plans to continue to keep paying its dividend, which is an outsized 6.5% yield thanks to the firm’s depressed share price.
The bank is well-capitalized, with its CET1 (tier one capital ratio) clocking in at 9%, which is the internal target set by Synovus’s management and double what the regulators require.
Plus, its payout ratio is just 36% (the percentage of profits paid as dividends). Generally, I look for a bank to pay 60% or less, so Synovus has plenty of cushion here.
Shares have rallied since we bought them. Including dividends, we’ve enjoyed 12% total returns in less than four months. But thanks to a rally in the firm’s assets, it now trades for just 66% of book—as cheap as April!
A 6.3% payer with a secure dividend, trading at 66% of book? It doesn’t happen often. If you don’t yet own Synovus, this is still a good time to bet on this talented banking team.