As expected by the markets, SunTrust Banks, Inc. (STI - Free Report) has announced a raise in its stock dividend. This followed the approval of its 2017 capital plan by the Federal Reserve in June.
SunTrust declared a quarterly cash dividend of 40 cents per share, up a whopping 54% from the prior payout. The dividend will be paid on Sep 15 to shareholders on record as of Aug 31. Based on the last day’s closing price of $58.05 per share, the dividend yield is 2.76%.
Additionally, SunTrust’s capital plan includes authorization to repurchase $1.32 billion worth of shares, through the third quarter of 2018.
Other than SunTrust, several other major regional banks including BB&T Corp. (BBT - Free Report) , Comerica Inc. (CMA - Free Report) and Bank of America Corporation (BAC - Free Report) increased their quarterly dividends (as part of their 2017 capital plan) in the range of 10–60%.
Given its solid liquidity position, earnings strength and lower debt level, SunTrust is likely to be able to sustain improved capital deployments and also continue enhancing shareholders’ value going forward. But is it worth considering this Zacks Rank #3 (Hold) stock to earn this dividend income?
Let’s dig deeper into its financial performance and fundamentals to understand the risk and rewards.
SunTrust’s net revenue witnessed compounded annual growth rate (CAGR) of 2.1%, over the last four years (2013–2016). The increase has been backed by strong loan and deposit growth along with the efforts to enhance revenue growth through several initiatives. The company’s projected sales growth for 2017 is 5.2%.
Further, SunTrust has witnessed 13.3% rise in earnings per share over the last three to five years. The trend is expected to continue in the near term as well. The company’s projected EPS growth is 13.7% and 9.2% for 2017 and 2018, respectively.
Also, SunTrust’s cost-saving measures have borne results and support profitability. Though non-interest expenses declined at a four-year CAGR (2013–2016) of 2.1%, the trend reversed in the first half of 2017 and in 2016 (in sync with its efforts to enhance revenue growth). Nonetheless, as the company continues with its initiatives of consolidating branches, the overall expense level is expected to remain manageable.
Despite these favorable trends, the stock has gained 5.9% compared with the industry’s rally of 7.2% so far this year.
SunTrust’s trailing 12-month return on equity (ROE) undercuts its growth potential. Though the company’s ROE of 7.60% has gradually improved over the years, it compares unfavorably with ROE of 8.72% for the industry and 15.66% for the S&P 500, reflecting its low efficiency in using shareholders’ funds.
Additionally, SunTrust stock looks overvalued based on its price-to-book (P/B) ratio. The company currently has a trailing 12-month P/B ratio of 1.25, which is near its high over the last five years.
Also, the stock has a Value Style Score of ‘C’. The Value Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of ‘A’ or ‘B’, when combined with Zacks Rank of #1 (Strong Buy) or #2 (Buy), offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
With a steady dividend income opportunity, SunTrust stock appears to be a good investment option now based on its strong fundamentals. However, investors should keep an eye on the stock’s performance as it is significantly overvalued.
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