Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
SBSI is trading at a discount to all four valuations above. The stock is trading at a 34.6% discount to its calculated fair value of $31.01. SBSI earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
SBSI earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. SBSI earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1969 and has increased its dividend payments for 12 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
SBSI earned a Star in this section for its NPV MMA Diff. of the $32,940. This amount is in excess of the $2,300 target I look for in a stock that has increased dividends as long as SBSI has. The stock’s current yield of 4.07% exceeds the 3.9% estimated 20-year average MMA rate.
Memberships and Peers: SBSI is a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Cullen/Frost Bankers, Inc. (NYSE:CFR) with a 2.9% yield, First Financial Bankshares Inc. (NASDAQ:FFIN) with a 2.7% yield and International Bancshares Corp. (NASDAQ:IBOC) with a 2.0% yield.
Conclusion: SBSI earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks SBSI as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $49.23 before SBSI’s NPV MMA Differential decreased to the $2,300 minimum that I look for in a stock with 12 years of consecutive dividend increases. At that price the stock would yield 1.68%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,300 NPV MMA Differential, the calculated rate is 8.5%. This dividend growth rate is significantly below the 16.6% used in this analysis, thus providing only a margin of safety. SBSI has a risk rating of 2.25 which classifies it as a medium risk stock.
SBSI has assets of approximately $3.0 billion and operates 48 community-banking facilities in Texas including two branches in Fort Worth, one in Arlington and a loan production office in Austin. SBSI offers a full range of financial services including consumer and commercial loans, loans to municipalities, deposit accounts, trust, personal banking, safe deposit boxes, brokerage services, credit cards, ATM’s and an array of electronic services. I have been looking for a bank to add to my portfolio and have been watching SBSI for some time. By every metric that I track, SBSI is trading at a discount. For the most part, it has good dividend fundamentals. My hesitation comes from its level of debt. At 77%, SBSI’s debt to total capital well in excess of the 45% maximum that I look for, so I will stay on the sidelines at this time. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in SBSI (0.0% of my Income Portfolio). See a list of all my income holdings here.
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