Should I Buy Regions Financial (RF)? 3 Pros, 3 Cons

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Regions Financial Corp (RF), came from humble beginnings in 1971 when three Alabama based banks merged to create what is now Regions Financial with $543 million in assets and 40 branches, Regions Financial now boasts $118 billion in assets, multiple product lines, 1,700 banking offices and 2,000 ATMS over 16 southeastern states.

Regions Financial 185Like most U.S. banks in the pre-2007-2009 recession era, Regions Financial’s growth was focused on mortgages and other real estate lending.

Unfortunately, Regions Financial’s footprint in the southeast included significant exposure to Florida, a state that had experienced significant overbuilding prior to the collapse.

To right the ship and correct the woes of the past, Regions Financial increased its loan loss reserves took TARP money and retrench during the recession. In April 2012, RF was able to pay back the TARP money, and net income turned positive for the year.

RF Stock Pros

Regions Financial is growing: Regions Financial is moving in the right direction in a rough interest rate environment. YTD loan balances grew by $2 billion, or 3%, led primarily by its consumer lending portfolio. Moderate growth is not at the expense of quality, as Regions Financial’s allowance for loan and lease losses continue to decline. In addition, Regions Financial continues to whittle away on non-performing loans which declined 7% from Q2 to Q3; delinquencies were down 4% and troubled debt restructurings were down 7% over the same period.

Focus: Regions Financial is focusing on its core regional franchise which is where it performs best. In addition, with gas prices continuing to decline, the economy could see a broad economic boost at the end of the year and into 2015 as consumers will feel more confident driving consumer spending and therefore consumer and commercial lending. In addition, Regions Financial’s core footprint includes southeast markets that are anticipated to outpace the overall U.S. growth rate, like Florida and Georgia.

Rising Interest Rates: The Federal Reserve has decided to end its quantitative easing program and although the Fed has continued its commitment to a low interest rate environment for the foreseeable future, with declining unemployment and increasing consumer confidence interest rates should increase modestly next year.

RF Stock Cons

Less Diversification: While the company’s focus is a good thing, its lack of diversification is a bad one. In order to pay back the TARP money and release itself from the burden of paying an extremely taxing dividend to the US government on the preferred shares it held, Regions Financial sold its Morgan Keenan bokerage division to Raymond James in 2012. Although I think this was a good idea, it will be harder for Regions Financial to grow its fee based wealth management operations without it, and RF will need to look to other fee based revenue sources to diversify its revenue stream outside of net-interest-margin.

Valuation: The consensus price target of $11 does not leave much room for price appreciation from Regions Financial’s current trading range. RF stock’s price-to-book ratio is 0.9, which is not bad compared to an industry average of 1.3, but banks need to have profitability that exceeds their cost of capital in order to warrant a premium above 1. And RF’s return on equity of 8.7% is significantly below the average of 9% that other banks have been able to generate over the same period.

Dividend: RF had to suspend its dividend until it paid back its TARP money. Starting in 2012, Regions Financial re-instituted its dividend and now has a payout ratio of 19.8% which yields 2%. That dividend yield is well below the rate it used to be. Investor can probably expect another 2 cents per quarter increase in 2015, but I would not bet on any more than that, which is disappointing.

Verdict

Regions Financial is still in a turnaround mode but has week earnings growth, and the dividend has not returned to historical levels. I don’t think RF stock is a bad buy, but there are better options out there with less risk.

I would keep RF stock on a watch list and look for improved earnings and a return to historical dividend rates.

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As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/regions-financial-rf-stock/.

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