Many banks stand to benefit from this week’s passage of a bill in the U.S. House of Representatives: the Economic Growth, Regulatory Relief, and Consumer Protection Act.
The legislation, which has already passed the U.S. Senate, will provide relief from “enhanced prudential standards” that were mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, thus easing financial and regulatory burdens on smaller banks.
Importantly, every dollar and work-hour that is saved from regulatory compliance can be channeled into supporting and growing banks’ business operations, client service and employees.
In addition, the legislation will increase banks’ abilities to return capital to shareholders through dividends and stock buybacks. And I like one mid-cap bank stock in particular.
A Mid-Cap Bank Stock with Aggressive Growth
Synchrony Financial (SYF – yield 1.7%) is an 85-year-old consumer finance services company that offers consumer banking and loans and is one of the largest providers of private label credit cards in the U.S., including credit card partnerships with Amazon.com (AMZN) and Wal-Mart (WMT).
Synchrony and its customers benefit from a growing economy, lower income tax rates, lower unemployment and higher consumer confidence, all of which the U.S. economy is experiencing this year. Cost savings from the proposed Senate bill will additionally boost Synchrony’s earnings per share (EPS).
Synchrony is expected to see EPS grow aggressively by 30.2% and 24.9% in 2018 and 2019. Those consensus estimates come from 24 Wall Street analysts, and barely waver from week to week.
Keep in mind that earnings growth is not unlike wage growth. Five percent is an acceptable number. If your salary grew 30% this year, you’d be pretty darn excited, right? It’s not any different with corporations. A 30% earnings boost gives a company tremendous financial flexibility to strengthen the company, reward the workers and shareholders, and develop new business ventures.
Despite this phase of relatively gigantic multi-year earnings growth throughout the financial sector, Synchrony’s stock carries 2018 and 2019 price/earnings ratios (P/Es) of just 10.6 and 8.5. While it’s understood that the market generally allocates lower P/Es to financial stocks than it does to pharmaceutical and technology stocks, Synchrony’s P/Es could possibly double before analysts begin raising red flags on the stock’s valuation. And the only way the P/Es could double is if either the earnings projections fall in half or the share price doubles!
There’s clearly no negative situation on the horizon that threatens to harm Synchrony’s earnings growth, so I’m betting that investors soon begin scooping up shares of financial stocks as they recognize the potential for capital appreciation.
Synchrony began paying quarterly dividends in 2016, followed by a dividend increase in the summer of 2017. Then in mid-May, the company announced that it will increase its dividend by 40% in the third quarter, from $0.15 to $0.21 per share. With a share price of 36, the current yield of 1.7% will rise to 2.3%. Synchrony also announced a new $2.2 billion repurchase authorization that will be in effect through June 2019.
SYF is a mid-cap bank stock with a $27.3 billion market capitalization and heavy institutional ownership.
The stock rose to a new all-time high of 40 in January, then came down to 32 as financial stocks declined during this year’s stock market correction. Stocks throughout the sector are now rising. Barring an unusual disruption at the company or within the broader market, I expect SYF to retrace its January high, rest a bit, then continue reaching new highs.
SYF is an appropriate investment for stock investors who are looking for capital appreciation and/or dividend income.
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