Dividend Investor Portfolio #20: Banking on this Bank
1
Dear Investor,
Welcome to the 20th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
1
1
Market-Moving News: August 5, 2024
It was a volatile week for the stock market as the Nasdaq Composite (NDAQ) slumped while the tech-heavy Nasdaq’s (NDX) slide landed it in correction territory, and it was down by 10% on Friday. The S&P 500 (SPX) and the Dow Jones Industrial Average (DJIA) posted sharp losses on Friday as a softer-than-expected jobs report heightened investors’ worries over an economic slowdown.
Even as the Fed had signaled last week that it could slash interest rates at its September meeting, investors fear that these could be coming too late, and the risk of a recession is rising.
The softer-than-expected jobs report prompted analysts at Goldman Sachs to state a 25% probability of the U.S. economy falling into a recession over the next 12 months. This is higher than their earlier predicted probability of 15%.
In contrast, David Kelly, chief global strategist at JP Morgan Asset Management stated that while the jobs report was “too cool for comfort,” it does not mean that the U.S. economy is falling into a recession.
Many economists believe that the latest jobs report shows an economic slowdown, not necessarily a recession.
The technology sector saw a sharp sell-off even as tech giants reported quarterly results last week. The tech biggies, Microsoft (MSFT), Google (GOOGL), Amazon (AMZN), Meta (META), and Apple (AAPL) reported a mixed bag of results last week.
While Microsoft’s quarterly results topped expectations, the lower-than-expected growth of its cloud computing platform, Azure, was a cause of worry. Amazon reported mixed Q2 results and its Q3 revenue outlook was below Wall Street’s expectations.
In contrast, Apple’s results proved to be a pleasant surprise for investors and analysts remained upbeat about the next version of its iPhone and its artificial intelligence strategy. Meta Platforms, too, reported robust results though it warned that its spending on tech (including artificial intelligence) would continue to rise. AAPL will be a closely watched stock this week, as Warren Buffett’s Berkshire Hathaway (BRK.B) sold off close to 50% of its stake in the iPhone maker.
Meanwhile, chip giant Intel (INTC) proved to be a big disappointment as it suspended its dividend and announced that it would lay off 15% of its employees. The company expects its revenues in the third quarter to be between $12.5 billion and $13.5 billion, well below analysts’ forecasts of $14.4 billion. INTC stock slumped by 26.1% on Friday.
1
1
This Week’s Quality Dividend Stock Idea
The Bank of New York Mellon Corp. (BK), commonly called BNY Mellon, is one of the oldest banking institutions in the United States. The bank traces its roots to the Bank of New York founded by Alexander Hamilton in 1784.
In 2007, the merger of the Bank of New York and Mellon Financial Corp formed BNY Mellon, solidifying its legacy as one of the oldest financial institutions in the United States.
The bank is headquartered in New York with $49.5 trillion in assets under custody and administration and $2.0 trillion in assets under management as of June 30, 2024.
Today, with a market capitalization of $47.4 billion, and annual revenues of $17.5 billion, BNY ranks #130 on the Fortune 500 list.
1
BNY’s Two Core Areas of Focus
The financial institution primarily focuses on two core areas: Investment Management and Investment Services. It offers trust and custody activities, investment management services, banking services, and other securities-related activities. The bank has two principal banking subsidiaries. One is The Bank of New York Mellon, a chartered bank based out of New York, which provides asset servicing and issuer services, treasury services, and investment management. Its other subsidiary is a national bank, BNY Mellon, which provides wealth management services.
Additionally, the bank has four U.S. bank/trust company subsidiaries specializing in trust services nationwide: The Bank of New York Mellon Trust Company, BNY Mellon Trust of Delaware, BNY Mellon Investment Servicing Trust Company, and BNY Mellon Trust Company of Illinois.
As of December 31, the bank had around 53,400 full-time employees.
1
Services Spanning the Length and Breadth of the Banking Industry
The bank’s three key business segments include Securities Services, Market and Wealth Services, and Investment and Wealth Management. The company’s Securities Services business segment consists of two lines of business, asset servicing and issuer services. The Asset Servicing business provides safekeeping of assets in global capital markets, fund accounting, exchange-traded funds servicing, transfer agency, trust and depository services, front-to-back capabilities, and data and analytics solutions.
The bank’s Issuer Services business encompasses Corporate Trust and Depositary Receipts. The Corporate Trust business provides a full suite of issuer and investor services, including trustee, paying agency, fiduciary, escrow, and other financial services. BNY’s depositary Receipts business enhances global investing by facilitating cross-border trading, clearing, settlement, and ownership.
The Market and Wealth Services business segment is made up of three distinct lines: Pershing, Treasury Services, and Clearance and Collateral Management.
Pershing delivers execution, clearing, custody, and technology solutions, providing operational support to broker-dealers, wealth managers, and registered investment advisors (RIAs) worldwide.
Treasury Services is a leading provider of global payments, liquidity management, and trade finance services, catering to financial institutions, corporations, and the public sector.
Clearance and Collateral Management handles the clearing and settlement of equity and fixed-income transactions globally.
BNY Mellon Investment Management is a top global asset manager, consisting of seven specialist investment firms and a global distribution platform. This combination allows it to offer a diversified range of investment capabilities to institutional and retail clients across the globe. Wealth Management offers a comprehensive suite of services, including investment management, custody, wealth and estate planning, private banking, investment servicing, and information management.
1
BNY’s Robust Financials
BK delivered impressive second-quarter results, surpassing estimates and showcasing its financial strength. The bank’s largest revenue-generating segment, Securities, saw its Investment Services fees grow by 3% year-over-year to $1.34 billion in the second quarter. The Asset Servicing segment experienced a 4% increase, driven by higher overall market values and net new business. This growth was primarily fueled by a 16% rise in foreign exchange revenue and a 1% increase in issuer services, despite a decline in depository receipts fees.
Analysts project that BK’s earnings and revenue will grow annually by 9.7% and 3.2%, respectively. The bank’s return on equity (RoE) is expected to reach 11.4% over the next three years. In the second quarter, BNY achieved a RoE of 12.7%, which is notably strong given that a RoE greater than 10% is generally considered excellent in the banking industry.
Additionally, the bank’s return on tangible common equity has been steadily increasing, reaching 24.6% in the second quarter. This metric reflects the bank’s efficiency in allocating funds to generate earnings for equity investors. Over the past five years, BK has maintained an average return on total assets of 0.84%.
BK boasts a robust balance sheet, with a net interest margin of 1.2% at the end of the second quarter and an allowance for bad loans at 0.3% of its total loans. The loan-to-deposit ratio, an indicator of the bank’s liquidity, stands at 23%, indicating ample liquidity to meet any unforeseen funding requirements.
Furthermore, the bank’s Common Equity Tier 1 (CET1) ratio, which assesses its vulnerability to a sudden rise in bad loans by measuring core equity capital against total risk-weighted assets, was 11.4% at the end of the second quarter. This demonstrates BK’s ability to absorb losses and remain liquid.
Lastly, BK has a moderate asset-to-equity ratio of 10.4x, with 79% of its liabilities consisting of low-risk primary funding sources.
BK has surged over 20% year-to-date, outperforming the S&P 500, which has gained 12.7% during the same period. Despite this impressive rise, analysts believe the stock is still trading at 29.6% below its estimated fair value.
1
Continued Dividend Growth and Shareholder Returns
BNY Mellon announced a quarterly dividend of $0.47 per share for the second quarter. Starting in the third quarter, the bank has also announced its intention to increase its dividend by 12% from $0.42 to $0.47 per share. This decision underscores BNY Mellon’s commitment to rewarding its shareholders, which is reflected in its current dividend yield of 2.68% and a 15-year history of consistent dividend growth. Over the past three years, BNY’s dividends have grown at a CAGR of 10.65%.
The bank’s dividend payout ratio stands at 40%, meaning its dividend payments are well covered by earnings. Year to date, BNY Mellon has returned an impressive 107% of its earnings to shareholders through dividends and buybacks.
Dividends play a crucial role in BNY Mellon’s capital allocation strategy, complemented by opportunistic share repurchases. In the second quarter alone, the bank repurchased 10.3 million common shares at an average price of $58.52 per share. Additionally, earlier this year, BNY Mellon authorized a substantial new common stock buyback program totaling $6 billion.
1
Investing Takeaway
To conclude, we view BK as a solid financial institution with a robust financial foundation that will be able to withstand potential challenges, especially in the current volatile macro environment. The company’s stable rate of dividend growth, expected to continue in the years to come, makes it an attractive addition to long-term income portfolios.
1
1
1
Dividend Investor Portfolio
1
Portfolio News
¤ Amgen (AMGN) is expected to report its second-quarter results on August 6. Analysts expect the pharma major to report earnings of $4.98 per share on revenues of $8.35 billion. Meanwhile, analysts from Jeffries have reiterated a Buy and raised the price target to $380 from $375 as it sees AMGN delivering a beat on revenues and earnings and expects to raise its guidance. It views AMGN as the “best new moneyflow,” citing its obesity drug and other catalysts.
¤ Automatic Data Processing (ADP) posted robust fiscal fourth-quarter results on July 31 as results beat analysts’ expectations. The company’s employer services’ new business bookings came at the higher end of the company’s expectations with new business bookings increasing 7% year-over-year. ADP’s employer services offer human resources outsourcing solutions. Furthermore, in FY25, ADP has projected solid revenue growth of 5% to 6%.
¤ LyondellBasell (LYB) reported better-than-expected results in the second quarter and maintained a strong investment-grade balance sheet with $2.9 billion in cash and short-term investments. In the third quarter, the company anticipates that its margins will continue to benefit from the low costs of natural gas and natural gas liquids used in LYB’s production facilities in North America and the Middle East, compared to the higher oil-based costs in most other regions.
¤ Qualcomm (QCOM) announced fiscal third-quarter results, which exceeded market expectations. QCOM has beaten earnings estimates in its previous nine quarters. Over the past five years, the chip maker’s earnings have increased by 23.8%. In the fiscal fourth quarter, QCOM has projected an outlook with earnings of $2.45 to $2.65 per share, exceeding analysts’ expectations.
1
Recent Trades
None at the moment, although we are considering adding a stock to our portfolio when the market conditions allow for an attractive entry point. Stay tuned.
1
Portfolio Attributes
| Dividend Portfolio Yield |
Dividend Growth Rate | Annual Dividend Income |
| 3.79% | 9.28% | $3,762.20 |
| Yield-on-Cost Adjusted |
Weighted Growth | Equal-Weight 100K Portfolio |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Dividend Yield | Annual DPS |
| Automatic Data Processing (ADP) | Sep 10, 2024 | Oct 03, 2024 | 2.16% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
| Amgen (AMGN) | Aug 16, 2024 | Sep 06, 2024 | 2.62% | $9.00 |
| BlackRock (BLK) | Sep 09, 2024 | Sep 23, 2024 | 2.41% | $20.40 |
| Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 3.97% | $3.12 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.04% | $4.60 |
| Kroger (KR) | Aug 15, 2024 | Sep 01, 2024 | 2.12% | $1.28 |
| LyondellBasell (LYB) | Aug 30, 2024 | Sep 05, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Sep 12, 2024 | Oct 10, 2024 | 4.59% | $5.20 |
| Qualcomm (QCOM) | Aug 29, 2024 | Sep 20, 2024 | 1.85% | $3.40 |
1
1
1
Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
1
Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
