A cheap bank share offering respectable dividend income

This stock is insulated from global uncertainties, but benefits from the relatively strong US economy. 

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Solid fourth-quarter results were reported by Citizens Financial Group (NYSE:CFG) but they have not been reflected in the share price. On the contrary, recent share price weakness has opened up a buying opportunity.

Citizens is one of the oldest and largest financial institutions in the United States, though it has many better-known rivals, perhaps because its headquarters are in Providence, Rhode Island, rather than a more fashionable business centre such as New York or Boston.

Nonetheless, it has assets of $166 billion and it offers a broad range of banking services and products to individuals and to companies, ranging in size from small businesses to large corporations. It has 1,100 branches in New England, Atlantic coast and Midwest states.

Source: interactive investor  Past performance is not a guide to future performance

Citizens reported underlying net income of $454 million in the final quarter of 2019, up 4% on the same three months of 2018. Highlights were record non-interest income, up 17% year on year, record results in capital markets, foreign exchange and interest rate products and strong results in mortgage banking. That’s a fair slab of any bank’s business.

For the full calendar year, net income rose 4% to $1.8 billion and earnings per share jumped 8% to $3.84. The figures beat analysts’ expectation. The balance sheet remains strong.

Once again, the quarterly dividend has been raised, this time by 8%, which means the dividend for the first quarter of 2020, paid last week, was 22% higher than a year ago. 

Citizens bought back 10.9 million shares in the final quarter of 2019 at an average price of under $37. That took the total buybacks over the full year to 34 million shares at an average of around $35.50. That level may not be seen again, so this looks an astute move.

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One downside among the latest figures is a 29% increase in provisions for credit losses to $110 million. This is probably erring on the side of caution, as total non-performing loans and leases were down 8% to $703 million. 

The outlook for this year is positive, with a small boost from a string of mainly small acquisitions that expand the bank’s geographic reach and business clientele. As a regional US bank, Citizens should be reasonably insulated from global uncertainties while it continues to benefit from the relatively strong performance of the US economy. 

Net interest income should be higher, at least in the first quarter, with some growth in loans accompanied by stable margins. Non-interest income could be down a little from the particularly strong fourth quarter but still ahead of the comparative figure from the start of last year.

I pointed to Citizens as a potential investment last February when the shares were trading at around $35. It has been a roller coaster ride since then, with the stock swinging between $31 and $37 until November. They then surged to $40 in December and January before slipping to their current level of $38, still ahead of my origin buy level but more than 2% down since the 2019 figures were released.

Analysts think that the share price will do no worse than hold at current levels over the next 12 months and at best it will rise to $42. That higher target does not seem too challenging, considering that the consensus recommendation is to buy.

The yield is attractive at 4.1%, even if there are no further dividend increases in 2020, while the price/earnings ratio is undemanding at just under 10.

Hobson’s choice: As there will probably be no more financial news for nearly three months, it wouldn’t be wrong to hold off and see if the shares slip further, especially given the wild swings of the past year. If, however, there is any sign of share price recovery it would be wise to get in before the recent peak of $40 is reached.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.