BFR is very conservatively run with unusually high levels of liquidity and solvency for a bank. It has cash of over $1B and no net debt.
BFR & the Argentine Economy
From its inception in 1886, BFR has ridden through all the highs and lows of the Argentine economy and come out the other side in one piece – and with a superb balance sheet. It has developed into a strong, stable and conservative financial institution.
The graph below shows the ups and downs of the Argentine economy. Few other countries have had such a volatile economic history.
Source: SSPE Ministry of Economy
The Argentine economy grew around 9% in 2010, and the 1st and 2nd quarters of 2011 were similarly impressive. But Moody’s has a negative outlook on Argentina’s banking sector citing unsustainable government policies and general political risk as the source of the strain on the sector. And according to Routers, many private economists suggest inflation is running at over 20% whereas the government’s official number is around 10%. It seems the Argentina’s turbulent high growth high inflation story is set to continue.
The biggest risk to the Argentine economy remains the high inflation rate. Exports will lose their competitiveness with higher prices, and private consumption will gradually decrease as the price of goods and services becomes too expensive. The flow on effects could result in lower economic activity throughout the country which in turn will have negative flow on effects to Argentine banks such as BFR. With its impeccable balance sheet, and over 125 years operating in Argentina, BFR is certainly well positioned to ride out challenging economic periods.
BFR is a wonderful generator of cash. For the last 10 years, BFR has reported total net earnings of $690M while free cash flow has totalled $1.8B over the same time. Since 2003 BFR has enjoyed zero net debt, and today enjoys a sublime balance sheet with over $1B in cash. We like to see this sort of net cash position for a number of reasons. It allows the company to ride through any challenging times that might lay ahead, and it allows the company to take advantage of any opportunities to acquire distressed competitors to further strengthen their position. It also allows the company to buy back shares and pay dividends.
2010 was a great year for BFR, increasing net income from $188M to $301M and achieving a 35% NROE. $121M of the net income was distributed to shareholders providing shareholders with an attractive yield. Based on the current shareprice of around $6.30, the dividend yield for 2011 currently sits at over 17%, but investors should not rely on the dividend too much. The payout ratio over the last 10 years has been 100%, 0%, 0%, 0%, 0%, 8%, 28%, 43%, 4%, and 39% so a shareholder certainly cannot rely on the dividend. The payout ratio for 2011 is not far off 100%, so though the yield looks attractive at the moment, it almost certainly won’t last – at least not above 17%!
The Quality Rating of BFR is not too bad at 65. The company had a terrible year in 2002 posting a loss of $367M which is especially bad considering they posted an impressive gain of $301M last year. The terrible year in 2002 dragged some of the quality rating scores down considerably. The performance of BFR from 2007 to 2010 in particular has been good though.
The Intrinsic Value is going sideways for the next few years, but the IV is way above the share price. Indeed the shareprice is only about 15% above the reported book value.
For most of the last 10 years, the shareprice has been well above the IV, but that trend reversed in 2008. The shareprice went as low as $2.2 in late 2008/early 2009. The shareprice started to take a pounding in 2007 during the start of the credit crunch where all financial stocks fell out of favor. During the 2009/2010 market recovery the shareprice headed up again towards the IV line before dropping significantly in 2011 due once again to the general downward pressure on all financial stocks. The dramatic drop in shareprice in 2011 has created the potential opportunity we see today.
Investment Grade Table Position
BFR takes position number 33 this week on the USAStockValuation weekly Investment Grade Table. The investment grade table multiplies the quality rating and margin of safety together before dividing by 100 to get the Investment Grade Score. This allows only those companies with a good quality rating and margin of safety combination to make the table.
The Argentine economy has endured extreme highs and lows, and for over 125 years BFR has not only endured those extremes, but has actually thrived on them. During periods of economic slumps BFR has grabbed the opportunity to take over its distressed competitors, while during periods of economic prosperity BFR has built up its balance sheet ready for another acquisition.
BFR has over $1B in the bank (compare this to its market cap which is also slightly over $1B), zero debt, has proven itself over 125 years, is currently paying an above 17% dividend yield (though that won’t last), and is trading only slightly above book value. The upside potential vs downside risk for BFR is attractive, and many investors will see good value at current prices.