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Actionable news in CFR: CULLEN/FROST BANKERS Inc,

Mid-Cap Dividend Growth Stocks By Sector: Part 2A Regional Banks

Summary

Four attractively valued dividend paying mid-cap regional banks.

These research candidates include high-yield, moderate yield, and above-average growth opportunities.

Not every regional bank suffered during the financial crisis of 2008.

Introduction

In part 1 of this series on fairly valued mid-cap investment opportunities, I primarily focused on non-dividend paying growth oriented mid-caps. In part 2 of this series, I turned my focus to finding fairly valued dividend paying mid-caps. However, as I was evaluating dividend paying mid-caps in the S&P 400 mid-cap index, it became clear to me that the differences between dividend paying mid-caps were more important than the similarities. Therefore, I have grouped the dividend paying mid-caps I found into 3 separate offerings focusing on sectors. In this, part 2A, I will be exclusively covering fairly valued mid-sized regional banks.

However, I feel it's important to note that although there are several regional banks in the S&P 400 mid-cap index, I only found four dividend paying regional banks of reasonable quality that I considered attractively valued at this time. There were others that appeared reasonably valued, but they were excluded primarily because they were apparently willing participants in the financial debacle that many believe led to the Great Recession of 2008. Nevertheless, two of the four research candidates I present below did suffer stress during the financial crisis; however, their post-crisis recoveries have been stronger than those I excluded.

4 Fairly Valued Regional Banks

The following portfolio review summarizes the four mid-cap dividend paying regional banks. The portfolio review lists them by ticker, name, credit rating, sector, exchange, P/E ratio, dividend yield and market cap.

Note: S&P Capital IQ does not report debt to capital on banks. Therefore, ignore the debt to capital number shown in the F.A.S.T. FACTS boxes to the right of the graphs.

Since many readers may not be familiar with each of these small-cap selections, I offer the following overview of each of the 4 research candidates. Courtesy of S&P Capital IQ, I included a short business description on each. Additionally, I have provided earnings and price correlated historical F.A.S.T. Graphs on each with a calculated return forecast out to 2017 based on what I considered the most appropriate valuation reference line.

Note: I have moved the return calculation pop-up to the left corner of the graph so that it did not cover up important data listed in the F.A.S.T. FACTS.

F.A.S.T. Graphs Tutorial

In order for the reader to get the maximum benefit from the following presentation, I offer a short tutorial illustrating the various components presented in F.A.S.T. Graphs. To accomplish this, I will present each component of the graph separately as I rebuild an entire graph. I have chosen Cullen/Frost Bankers, Inc. as my tutorial example because it will be the first research candidate I will eventually present.

My first screenshot reflects a plotting of earnings per share. The green shaded area represents a mountain chart of the company's earnings over the time frame drawn. The orange valuation reference line contains two important aspects. The first aspect is a multiple of earnings (P/E ratio) that is listed in the orange-colored rectangle in the F.A.S.T. FACTS to the right of the graph. In this example, the orange line represents a P/E ratio of 15. In other words, any time the stock price touches the orange line anywhere on the graph in this example, it will be trading at a P/E ratio of 15.

The second aspect of the orange line is the slope which is equal to the earnings growth rate. In this example, the orange line is increasing at the earnings growth rate (the green rectangle in the F.A.S.T. FACTS) of 6.8%. Although there is some cyclicality with earnings in between, this growth rate is calculated as the annualized growth from the first year's earnings per share to the last year on the graph.

With my second screenshot, I overlay monthly closing stock prices. This illustrates how stock prices move in conjunction with earnings over the long run. Moreover, periods of overvaluation (when price is above the orange line), fair valuation (when price is touching the orange line) and undervaluation (when price is below the orange line) is clearly revealed. Most importantly, since stock price tracks earnings, it is clear that the company's earnings achievement is what drives the capital appreciation component of total return.

This next screenshot adds a second valuation reference line (the dark blue line) which is a calculated normal P/E ratio for the time frame drawn. In this example, the normal P/E ratio line represents a multiple of 16.4. With both of these valuation reference lines on the graph, a clear perspective of a range of valuation is revealed for analysis.

This next screenshot adds a plotting of the company's dividends per share prior to being paid out of earnings. The area below the light green line (it appears white to many people) represents the portion of earnings paid out to shareholders. Therefore, the company's dividend payout ratio [POR] is graphically presented for instant reference.

This next screenshot presents a second dividend reference. The light green shaded area above the orange line indicates the same...


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