Description

TFSL has been written up five times before on VIC but what caught my attention is the 8% dividend yield. After dropping over 25% in the past year, I think it can rebound to $17 and with the dividend produce a 20% return. 

History: I recommend reading all the VIC write-ups but start with Hawkeye901’s VIC write up from 2007, right after it did its first step conversion.

https://valueinvestorsclub.com/idea/TFS_Financial/7720426287

Capital Structure: This is complicated but once you understand the nuances, you can appreciate the investment angle here. The bank sold 105 million shares @ $10 in 2007, and the MHC retained 227,119,132. Since then, the bank has spent $768,304,000 to buy back 51,488,012 shares, leaving 53,677,984 shares. And still the bank is over-capitalized.

Let me address the elephant in the room with regard to a 2nd step. I think that there is a greater chance that Kanye West converts to a woman than TFSL does a second step conversion.

The first reason is that TFSL is a family-run business that was started by the CEO’s grandparents back in 1938. Although the CEO Marc Stefanski has no kids, his niece (Ashley Williams) and nephew (Ben Stefanski III) are being groomed to take over the business and are on the board of directors. The MHC structure allows them to maintain control. 

Second, the economics for a 2nd step are not there. While 2nd steps are unnecessarily complicated, you can get a quick approximation by multiplying the number of MHC shares by the current price which comes to a $3.0 billion equity deal vs. the current equity of $1.8 billion. Then to obtain the same 8-1 leverage of assets of the current $14.6 billion in assets, the bank would have to add $38.8 billion in assets.

The third factor is the dividend. TFSL is one a few MHCs that has been grandfathered in not having to pay the dividend on the MHC shares. Granted, the dividend waiver on the MHC shares has to be voted on every year but it is mainly a formality. The former Office of Thrift Supervision (OTS) allowed this but when the OTS was dissolved, the Office of the Comptroller of the Currency (OCC) took over as the regulator for thrifts. The OCC changed the rules so that any MHC going forward could not waive the dividend to the MHC shares but grandfathered existing ones. This is a huge deal because there is no way that TFSL could sustain the current dividend if it fully converted. The annual dividend payout is $1.13/sh or a total of $60.7 million that about equals the entire FY 2022 earnings. If the bank had to pay dividends on the MHC shares, it would probably have to reduce it by 80% to 90%. Since 2007, the bank has paid a cumulative $354 million in dividends to shareholders. Add in the buybacks, and TFSL has returned $1,122 million to shareholder, which is more than the bank raised back in 2007. What makes this even more impressive is that the bank was in the penalty box for four years and could not do any buybacks or pay any dividends. In June 2010, a Memorandum of Understanding (MOU) was issued against the bank due to excessive amounts of home equity lines of credit (HELOC).

Bottom line, TFSL is more like a preferred stock, where the dividend is variable and non-cumulative and the stock has call or put features, and has no par value. However, I believe that it should rebound from the recent sell off and get to the $16 - $17 range.

Operations : The bank has 37 branches, with 21 in Ohio and the rest in Florida, plus 5 loan centers.

Dividend Support: The bank announced earnings last week and things have stabilized. Only one firm covers the bank and it is noted bank specialist Piper Sandler. The FY 2022 estimate is $0.23/sh and FY 2023 is $0.26/sh (which includes the MHC shares). That will cover the dividends. Also, Sandler has a price target of $21.

Risks: Dividend gets cut.

Catalyst

Time and reversion to the mean.