|Shares Out. (in M):||141||P/E||0||0|
|Market Cap (in $M):||1,819||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Let’s be clear, I don’t think anyone is going to like this pitch. It certainly isn’t exciting.
Capitol Federal is a small, over-capitalized, regional bank that is essentially unable to grow past the $10b regulatory limit. There won’t be a buyout anytime soon, the narrative on the stock is unlikely to change, and there’s nothing exciting about the business.
I’ll give some potential scenarios and “market mispricing” later, but here’s why you might be interested:
Background on the above thesis will follow, but let’s cut straight to the chase:
Details and Background
There is a previous good thread on CFFN on VIC. https://www.valueinvestorsclub.com/idea/CAPITOL_FEDERAL_FINANCIAL/41051
I won’t go through everything. To repeat: This is a bank that will not grow past $10b, it will not have world-beating net interest margins, but it makes up for it with great efficiency and high-quality assets. The financial results are, in a word, average. There won’t be a buyout for years. What you are getting is a little growth (in operations) company with solid capital discipline potentially looking at a yield re-rating. However, some interesting tidbits:
CFFN pays $0.34/year ($0.085 quarterly) in regular dividends. At year end (Sept close) it pays a special dividend to reach a 100% payout ratio. This usually is declared in Oct and paid in Nov.
In June, it pays an additional special dividend to reduce excess capital. This needs to be approved by regulators every year and has historically been $0.25/year since the second-step conversion. I see no reason for this to change and assume $0.25/share per year going forward. The question is how long this special dividend can reasonably be paid. Q3 2018 Equity to Assets of 14.8% and Tier 1 Capital to Assets of 13.0%. There’s some further difference depending on whether you include cash already swept from the bank level up to the parent company. Assume CFFN runs at exactly $10b in Assets and a conservative 11% leverage ratio. That’s $241.3m to be paid out, or at the current annual rate of $33.6m/year, over 7 years remaining. We’re probably looking at a decade of special capital dividends.
Return on Equity
FY2017 Annual Report Presentation: