Community Trust Bancorp Inc. (CTBI, Financial), a regional bank operating in Kentucky, Tennessee and West Virginia, is eye-catching with its 40-year-long dividend growth streak, but the GF Value Line that indicates it is modestly undervalued is also appealing.
The stock also trades at a considerable discount to its median price-book value.
Book value grew at a steady compounded annual rate of 5.61% over a 15-year period that included two economic downturns.
The stock meets the criteria established by Benjamin Graham for both defensive and enterprising investors. The Graham number, a concept based on the guru's conservative valuation of companies, for Community Trust Bancorp is 56.7 according to GuruFocus. It also meets my modified Graham criteria for more aggressive investors given its price-earnings ratio of 9.35, which is low due to its mid-single-digit growth rate. Rather, it should be trading at a price-earnings ratio of around 14 based on my calculations.
The bank's key metrics for the first quarter of the year, which ended March 31, were:
- Total assets: $5.4 billion
- Market capitalization: $717 million
- Cash dividend yield: 3.83%
- Price-earnings ratio: 9.34
- Price-book value: 1.08
- Price-to-tangible book value: 1.3
- Tangible common equity ratio: 11.27%
Tier one capital (to risk-weighted assets) was 18.94% and total capital (to risk-weighted assets) was 20.05% as of Dec. 31.
Over the past decade, the bank's total assets have grown at the rate of 3.41% per year, while total equity increased at a rate of 6.58% per year and net income at 5.78% per year. Note that equity and income have grown at a faster pace than assets, which is a good thing for a bank.
Revenue, meanwhile, grew by 1.7% a year. It is impressive when a bank's income grows much faster than its revenue as it shows the company maintains its underwriting standards.
The chart below also breaks down net interest income and non-interest income.
The bank's credit loss provisions have begun to trend downward after an increase in 2020. Community Trust recognized a recapture of allowance for credit losses with a credit to provision for credit losses of $2.5 million for the first quarter of 2021, compared to a provision for credit losses of $1 million for the previous quarter and $12.7 million for the prior-year quarter.
The change in the provision for credit losses compared to the fourth quarter of 2020 was due primarily to the improvement in net charge-off experience affecting its vintage loss analysis in several segments, the most significant of those being the indirect lending and residential lending segments. Credit loss reserve as a percentage of total loans outstanding as of March 31 was 1.28% (1.38% excluding PPP loans) compared to 1.35% on Dec. 31, 2020 (1.46% excluding PPP loans) and 1.50% on March 31, 2020.
The bank pays a good, growing dividend yield of 3.83% and has a dividend payout ratio of 36%.
The dividend growth rate has been as follows over the past decade:
| Growth Rate | |
| 1 Year | 3.40% |
| 3 Year | 5.60% |
| 5 Year | 4.90% |
| 10 Year | 3.40% |
The company has been paying an increasing dividend for 39 years. For the Oct. 1, 2020 distribution, it raised the dividend by 1.3% to 38.50 cents. It has remained at that rate since then.
Conclusion
Community Trust is a well-managed bank trading at a fair price. While dividend growth may not be the highest, the company offers a very high yield and a very healthy payout ratio.
As a result, it is worth further consideration as it has the potential to be a solid buy.
