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Financial TSF (NASDAQ: TFSL) is a regional bank stock that I own primarily for yield. I own it to serve as a fixed income alternative, as do many of its other holders. With the recent sell-off of bonds, preferred stocks and other income investments, TFSL the stock was also affected:
After recouping its pandemic-induced losses in early 2021, stocks are now nearly back to March 2020 lows.
As the stock price fell, the dividend yield rose. TFS has increased its dividend for seven consecutive years, so there has been dividend growth on top of the yield increase even though the stock price has fallen:
As long as TFS Financial can cover its dividend – which, as we’ll see in a moment – stocks are very attractive as a fixed income alternative at current prices.
TFS is a Mutual Holding Company: Here’s Why It Matters
TFS Financial is in a unique situation as it is a mutual “MHC” holding company. In an MHC structure, shares that have not yet been issued to the public are still counted as shares outstanding and therefore significantly dilute a company’s reported earnings and other financial metrics. The truth is that the vast majority of TFS and other CMH’ The reported “stocks” don’t actually exist in any meaningful way, and therefore market caps, PE ratios, and all the other financial metrics you see in the filters are wrong.
Fortunately, TFS management has started trying to help the public understand the real financials with helpful slides in its recent quarterly earnings presentations:
TFSL Stock Overview (corporate presentation)
As the slide explains, the dividend only goes to minority shareholders. So despite paying out a dividend yield of then 6.8% (now 8.3%), the company’s dividend was fully covered and then part of the net income, the payout ratio being 91 % and 70% of net income in the last six months and fiscal year, respectively.
Additionally, TFS Financial has delivered incredible and consistent results over the past few years. Here are his last five years of earnings per minority share:
- Exercise 21: $1.51
- Fiscal year 2020: $1.57
- Fiscal year 2019: $1.52
- Fiscal 2018: $1.61
- Fiscal 2017: $1.64
There has been no growth to speak of, and the bank’s returns on equity and net interest margins remain low. But when a bank can reliably earn about $1.50 per share per year and pay out $1.13 of those earnings as dividends each year, it’s still an attractive offer when shares are selling for just $13.50. $. This gives a dividend yield of 8.3% and an earnings yield of over 10%.
Additionally, as the company explains in this slide, the true book value per minority share now stands at $33.43, which has increased significantly over the past decade. The dividend is not the only way to generate shareholder value.
As an additional point regarding the safety of dividends, the company is capitalized well beyond regulatory requirements. This gives TFS full flexibility to pay significant dividends and/or continue to act on its currently authorized share buyback program, regardless of short-term earnings volatility or general market conditions.
Low risk safe operations
As mentioned, the big knock against TFS Financial is that it is not a particularly profitable bank. It earns an unattractive “NIM” net interest margin of 1.82% last quarter. This is well below your average regional bank, which would be closer to 3%. However, in exchange for low yields on its loans, TFS has an excellent quality loan portfolio.
The company’s cost of capital is also quite low, averaging just 1.0% last quarter.
Cost of TFS Funds (Corporate presentation)
Indeed, it has a strong deposit base, with a significant portion of its total deposits being made up of checking and savings accounts paying just 0.1% on average. Its CDs only offer 1.1% as well. The company’s borrowings from other sources also cost just 1.5% overall, with even longer maturities available for less than 2%.
On the asset side of the equation, TFS faces some risk as 36% of its loans are fixed rate mortgages with terms of 10 years or longer. This is where TFS can be hurt if rates appreciate significantly and stay high. However, 10% of its loans are fixed rate mortgages that mature in 10 years or less, and the remaining 54% of the loan portfolio are variable rate mortgages, HELOCs and ELOANs, which are expected to have better return profiles in a rising interest rate environment. .
It should also be noted that 50% of TFS’ loan portfolio is in the state of Ohio. This means that TFS has less risk than if its loan portfolio were exposed to faster growing housing markets with higher prices and levels of speculation.
Additionally, TFS’s underwriting is exceptionally conservative. For the last fiscal year, TFS’s average new loan was granted to a borrower with a FICO score of 777 and only 59% LTV. It’s hard to imagine TFS losing a lot of money on these kinds of ultra-safe loans, regardless of what’s happening in the short-term housing market. This is especially true when lending on 59% of Ohio’s value rather than a more speculative state.
Conclusion of TFSL Stock
Now, how do we move from a stock price below $14 now closer to book value or at least a more reasonable P/E ratio? The easiest option would be for the bank to convert to a regular structure, thus leaving the MHC behind, and then selling itself. The current CEO has said he doesn’t want to convert under his leadership, but he’s getting old. The bank could be put up for sale fairly quickly if and when he decides to retire.
Otherwise, the stock may drift higher thanks to its rising book value. I think the stock would need to trade closer to 65-70% of book value to account for the MHC discount, which would put the stock around $22. At that price, it would still offer a dividend of over 5%, giving investors enough incentive to stick around.
That said, stocks have reached attractive value levels here as they continue to decline. With this exceptionally conservative and bland bank’s generous dividend now over 8%, this is a fantastic income stock. I also expect significant stock price appreciation once the current bloodbath in the fixed income market finally subsides.
