Can the “Joe Friday” of lenders generate big returns for your portfolio? This is the question we seek to answer in the latest issue of Hidden Profits.
The model behind Hidden Profits is simple and straightforward. We look for companies that pay you first. And since the model went live in 2009, the very best shareholder friendly companies – the A+ rated stocks – have returned 24.7% annually.
Few of these companies are sexy with glossy growth stories. Many are, in fact, boring. But boring can be good — and it can be profitable. This month we focus on a company we call the Joe Friday of lenders. This bank has been a solid operator writing mortgages since the 1930s, and it’s still controlled by its founding families.
Here’s something that might surprise you: Management recently stopped holding conference calls! This may be viewed negatively by Wall Street and investors, but I see this has a huge opportunity.
You see, very little about a business changes day to day. In some cases, very little changes in a quarter or even over a year. But, we live in a day and age of instant gratification and “140 characters or less” opinions.
French polymath Blaise Pascal wrote that “all men’s miseries derive from not being able to sit in a quiet room alone.” That’s a pretty erudite way of saying: not enough’s going on!
Because very little happens day to day or quarter to quarter, the financial media must make something up. Think of all the ways this game is played. It happens in sports during the offseason, where every athlete’s online move is closely examined; it happens in politics, where the 24-hour news cycle has now devolved into the 60-second news cycle.
It happens in markets, too, with eyes and ears pinned to the Federal Reserve. “What will the Fed do with interest rates? Up, down, and how much?” And then there’s business, particularly as it comes to publicly traded companies. Will Ajax Widgets beat, meet, or miss revenue and earnings estimates? And how much will it mean to the stock price?
Alas, one study shows that Wall Street analysts’ estimates are wrong 40% of the time. Why bother, except to be wary of management that plays the expectations game?
Back to the company we found. It’s an “all we want are the facts” story if ever there were one in financial markets. While management of this financial institution isn’t pleasing Wall Street with quarterly conference calls and guidance, what are they doing?
They’re focused on building shareholder value for you.
Can you imagine a company sporting a $4 billion market cap – and in the finance sector, no less – not holding earnings calls? Not trumpeting every positive piece of news as soon as the ink hits the paper?
At least one is out there.
Ever since this company regained its footing after the Financial Crisis, management has been dishing out its prodigious cash to shareholders in the form of massive buybacks and increasing dividends.
And management is buying back those shares at a massive discount to book value while saving on the dividend payment. Meanwhile, existing shareholders pockets will continue to be lined with dividends.
And that’s the big catalyst. A 36% increase in the dividend over the coming year.
Through masterful buybacks and a solid dividend strategy, the yield is poised to be 4.25%, over double what it was two years ago. Another way of looking at this: 20% annual returns without breaking a sweat.
It’s a story that cuts against the grain. Those are the stories that often have the biggest payoffs.
John Del Vecchio
Editor, Hidden Profits