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Nicholas Kitonyi
Nicholas Kitonyi
Articles (300)  | Author's Website |

Washington Federal: A Quality Regional Bank

Good dividends and earnings growth supplement modest top-line growth

July 18, 2019 | About:

Shares of bank Washington Federal Inc. (NASDAQ:WAFD) edged higher on Thursday after its most recent quarterly results were released on Wednesday.

The company beat analyst expectations on earnings per share, which grew 10% to 68 cents.

Washington Federal is a Seattle-based bank that provides lending, depository and insurance services to consumers and businesses. The company provides an interesting opportunity for those looking to invest in regional banking stocks in the Northwest U.S.

Key highlights from quarterly earnings

Washington Federal posted net revenue of $135.7 million, which beat analyst expectations by $1.$1.48 million. Net interest income was up 2% from the prior-year quarter to $121.7 million, but the net interest margin declined 11 basis points to 3.18%.

In addition, operating expenses soared 6% to $70.9 million. Management attributed much of this increase to higher compensation and benefits, as well as occupancy costs.

Net loan receivables increased from $11.5 billion to $12 billion.

Washington Federal also saw a slight improvement in credit quality, which caused the ratio of non-performing assets to total assets to drop 15 basis points to 0.31%.

Impressive dividends

The company currently has a dividend yield of about 2.23%, which is significantly better than the average of 1.86% for the S&P 500 and the industry average of 1.8%.

Based on the most recent results, the bank's payout ratio currently stands at 32%, which leaves a lot of room for future dividend growth. Washington Federal has managed to increase dividends at an annualized rate of about 10% over the last five years, and this could continue given its current payout ratio.

The company’s bottom line is expected to continue growing for the foreseeable future with analysts expecting mid-to-high single-digit earnings per share growth during the current fiscal year.

Growth catalysts

Washington Federal expects continued top-line growth in the coming years due to the increase in loans and deposits. The company’s loans portfolio has topped $12 billion, while customer deposits stood at $11.8 billion in the most recent quarter. This will boost the company’s net interest income in the coming years.

The company will also benefit from the overall improvement in the U.S. business confidence, which boosts credit uptake for small and medium-sized businesses. The United States Nfib Business Optimism Index has recently rebounded to top 103 points after falling toward the end of 2018 to about 101 points.

In the perspective of lending, the company continues to face competition from fintech startups that are disrupting the credit market. The small players are competing for the same market with regional banks like Washington Federal and offer more flexible credit solutions to businesses

From a valuation perspective, the company’s stock trades with a price-earnings ratio of about 13.67, which is relatively cheaper than rival Community Bank System Inc. (NYSE:CBU), which has a price-earnings ratio of 19.92.

When projected growth for the next five years is factored in, Washington Federal is still more appealing to potential investors with a price-earnings to growth ratio of 1.92 versus Community Bank System’s PEG ratio of 2.45.

In summary, Washington Federal appears to be trading at a good value. The company is also a good dividend stock and has room to continue growing. With the projected earnings growth, this could be a good time to invest in the Seattle-based regional banker.

Disclosure: I have no positions in the stocks mentioned.

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About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website

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