Actually he's right. BB&T has historically traded on its yield. I cannot see a scenario where bank yields will be below treasury yields as rates climb. That means that banks and BB&T are going to have make some hefty increases to their dividends to at least keep their share prices at where they are now. I dont see where they are going to get even bigger dividend increase to get the share price to go up. If rates climb and you expect BB&T to be at $45, then they will have to pay something like $2.50-$3.00. They are paying $0.60 now, will they quintiple the dividend payment? Would be nice, but i dont see that.
No Bankers Please, you make some great points. They hit BB&T shareholders where it hurts but seem to be based on reality rather than wishing and hoping. I looked through the recently filed 10-K today and noted a few things that seem to support some of the points that you referred to in your post:
(1) BB&T's diluted EPS was $3.00 in 2005 and has fallen to $1.16 per share in 2010
(2) BB&T's Return on Average Common Equity was 14.95% in 2005 and has declined to 4.85% in 2010.
(3) BB&T's price per common share has fallen from $41.91 on December 31, 2005 (according to Yahoo) to $27.45 today. I calculate this to be a decline of 34.5%.
(4) During 2008 - 2010, BB&T issued 139,540,000 shares of common stock (excluding shares issued for acquisitions) for $2,997,000,000. The average price per share works out to be $21.48 according to my calculations. The way I figure it, pre-2008 shareholders had their ownership interest in BB&T outstanding shares diluted by 25.5% during the past three years. The only good news is that although the average sales price was low, it was higher than the tangible book value of the shares outstanding at the end of 2008.
For individual long-term holders the dividend payments were a very important reason for owning BB&T common stock and the road back to the annual dividend rate of late 2008 and early 2009 looks very long if capital requirements and the regulatory scrutiny of dividends remain as they are today. The math is pretty simple. If a 30% (or thereabouts) dividend payout ratio is continued to be treated as a guideline, $6.00 per share (in round numbers) will be required to support the annual dividend rate that BB&T shareholders received not so long ago. This translates to after-tax earnings of approximately $4.2 billion. To put this into perspective, BB&T earned $0.8 billion, or $1.16 per share in 2010, and is projected by analysts to earn $1.70 or so per share in 2011.
As for a $40.00 share price, it will probably come before a $1.80 per share dividend (unless of course the Feds loosen dividend restrictions); however, experts almost uniformly attribute the recent rally in the stock market to the Federal Reserve's aggressive monetary policy which cannot last forever. It seems obvious to everyone except the Fed that inflation is gathering steam and will soon become evident. The combination of easy money and inflationary pressures will create higher interest rates which, if there are no other problems, will combine to compress P/E multiples and thus send the stock market into a correction mode which might last a while given the amount of liquidity that has been provided. This is a long way of saying that $40.00 could be further away than BB&T shareholders would like.
Ray Nathan old boy you did a splendid job of copying numbers from the 10-K report but you must remember that past performance is not necessarily indicative of future results.
I am upbeat on BB&T's prospects and, as someone said elsewhere on this message board, the Board of Directors would certainly not have awarded the conpensation packages that they did to Mr. King and the other Executives if they had not been convinced beyond any reasonable doubt that great performance was just around the corner.
Wanna bet. First, if BB&T makes 15% per annum for the next three years (unlikely), that is an unrealized gain. Accounting for transaction costs (fees, commissions, etc.) and the impact of capital gains (assuming a 2%-3% fee carry and a 20% total cap gains tax), then that 15% return is more like 9%. And if real inflation (not govt's phony stats) is running 8%-10% per annum, then you may lose purchasing power. This stock needs to be valued at $70 in 3 years to justify the invesmtnet now (and for long term holders, to justify over a decade of substandard returns). You are going to be badly beaten if you buy and hold right now, but that is exactly what BB&T's Mgmt wants you to do, and they tease you with the entire "we are not wall street we are old fashioned conservative bankers" mantra (while KK takes a $5M pay bump). This strategy is no different than the Fed and the Street telling you everything will be OK and you should not buy gold (which the US government will once again confiscate when it hits $5000 per ounce). No one should be long financials now, and it is not about BB&T being better or worse than any other bank...that is not the point. Interest rates will spike and the yield on BB&T's common will be ugly in comparison to money market rates and as a consequence, the share price will adjust down to compensate, unless they can make massive increases to the dividend, which they cannot do becuase they diluted the stockholder base with $1.6B in new common.