Huntington operates as a holding company for The Huntington National Bank. This bank offers commercial and consumer banking services. Operating in the Midwest Banking Industry, Huntington competes against Fifth Third Bancorp (FITB) and KeyCorp (KEY). Fifth Third has a trailing annual dividend yield of 2.1%, which equates to a $0.28 annualized dividend with a payout ratio of 24%. It has a forward dividend rate of $0.32. KeyCorp has a trailing yield of 1.2%, down from its five-year average of 2.3%. This amounts to a $0.10 annualized dividend with a payout of 11%. The forward rate was increased to $0.12.
Huntington has paid a very unstable dividend over the past several years. While choppy from 2001 to 2003, in 2004 it paid out $0.75. In 2005, 2006, and 2007, Huntington gradually increased payment, paying $0.85, $1.00, and $1.06 respectively. In 2008, it paid a much lesser dividend of $0.66 and in 2009 and in 2010, it paid a dividend of $0.04. The last $0.01 quarterly dividend was paid on 6/15/2011. For the last two quarters, it paid a $0.04 dividend and will pay a $0.04 dividend on 3/15/2012. Although this dividend payment seems quite low when compared to previous payments, Huntington has been seeking funding through share distribution for the past few years. This dilution of shares keeps the ultimate dividend expense high. It is currently paying at a $0.16 annualized rate with a payout ratio of 17%.
In 2009, Huntington incurred a substantial loss of $3,094 million. This resulted mainly from $2,606.9 million in non-cash goodwill impairment charges and $2,074.7 million in provision for credit losses. Most of the $2,606.9 million in goodwill impairment charges related to the acquisitions of Sky Financial and Unizan. Being that these were non-cash charges, liquidity was not affected. However, these charges subsequently diminished net income, total assets, and equity.
While taking a look at the net margin, although it was substantially negative in 2009, it has been marginally improving into 2010 and the trailing twelve months (TTM) to 5.27% and 16.33%, respectively. This appreciation is unimpressive, however, when compared to the average net margin from 2002 through 2006 of 23.85%.
The purpose of an acquisition is to grow a business and generate more revenue. Because the revenue has scarcely grown in recent years, the recent acquisitions have not been paying off. After incurring an over $3 billion loss in 2009, revenue increased by only 9.5% into 2010. Signs of further improvement dwindle with a TTM revenue of $2.65 billion, or 0.6% less than in 2010.
Despite subpar profitability, Huntington seems to have substantial cash to cover its dividend expense. In fact, as a percent of the ending cash balance, the dividend payment was 10.7%, 16%, and 4.1% in 2009, 2010, and the TTM, respectively. Aside from the cash provided by operations with substantial adjustments to net income from noncash items, Huntington has been seeing hefty contributions to cash from short-term financing activities such as deposits and short-term borrowings. Nonetheless, these are questionable provisional increases to the cash balance. Investors generally like to see net income being a substantial cash generator. In Huntington’s case, this is not so.
Being that Huntington has offered an unstable dividend over the past several years, it is difficult to estimate the future dividend payments with precision. However, it is likely that the dividend will increase in the near future. Huntington cut its dividend extensively after the 2009 losses. However, the liquidity was never affected by this loss. Non-cash items that are expected to enhance revenue were the main cause of this net loss.
Huntington will pay a $0.04 dividend in March of this year. I expect this rate to remain stable for the remaining 2012 quarters but spike into 2013. This $0.04 quarterly dividend equates to 1% increase from the trailing yield. This is still 1% less than the five-year average. Huntington has ample cash and growth potential to support a marginal dividend increase in the near future. It might also consider using excess cash to concentrate shares outstanding.
About the author:I'm mostly interested in income investing using dividends, preferred stocks and other debt instruments, and pair trading.
I fundamentally analyze every business from the top down.
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