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Acquisitions Support People's United (PBCT), Costs a Woe

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On Jun 25, we issued an updated research report on People's United Financial (PBCT - Free Report) . The company has witnessed solid organic growth in the last few years. Also, opportunistic acquisitions, with support from a strong balance sheet and capital position, are likely to aid long-term growth. However, consistently rising expenses and significant exposure to commercial loans remain major concerns.

The company’s Zacks Consensus Estimate for current-year earnings has been revised 1.9% downward, over the last 30 days. It currently carries a Zacks Rank #3 (Hold).

Over the past six months, the stock has lost 32.1% compared with the 35.5% decline recorded by the industry.

People’s United’s strong balance-sheet position, along with the sound inorganic growth strategies, has bolstered its revenues. In November 2019, it acquired United Financial Bancorp, a financial services firm, in a 100% stock transaction. The transaction is likely to be 7 cents accretive to earnings per share based on fully phased-in cost savings in the upcoming period.

As of Mar 31, 2020, the company held a total debt of $6.9 billion. Though the debt level has risen in the past few years, the bank’s time-interest-earned ratio of 7.2 has grown consistently over the past few quarters, indicating the company's ability to meet its debt obligations based on current income. Thus, People’s United has a lesser likelihood of default of interest and debt repayments if the economic situation worsens.

Further, the company remains committed to enhance shareholder value, aided by a robust capital position. This April, it raised its quarterly dividend by 1.4%, marking the 27th consecutive annual dividend hike. In addition, these capital-deployment activities are sustainable for the long term, given its favorable debt/equity ratio.

However, despite undertaking a number of expense-saving initiatives, People’s United’s elevated operating expenses remain a headwind. Over the last five years (ended 2019), costs have witnessed a CAGR of 7.8%. Though the company is focused on optimizing its branch network and has initiated installation of technology to improve efficiencies and reduce costs, high expense levels, due to merger-related costs, and higher compensation and benefits costs, are likely to limit bottom-line expansion.

Also, majority of People’s United's loan portfolio — nearly 72% as of Mar 31, 2020 — comprises total commercial loans (commercial and industrial lending as well as commercial real estate lending). Such high exposure to commercial loans is a concern.

Stocks to Consider

The ongoing-year earnings estimate for First Republic Bank (FRC - Free Report) moved 2.5% north over the past 60 days. The company’s shares have declined 8.3% over the past six months. It currently has a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TFS Financial Corporation (TFSL - Free Report) has witnessed a 4.5% upward earnings estimate revision for the current year in the past 60 days. This Zacks #1 Ranked stock has lost 26.1% over the past six months.

The 2020 earnings estimate for GAIN Capital Holdings (GCAP) moved significantly north over the past 60 days. The company’s shares have rallied 49.5% over the past six months. It carries a Zacks Rank of 2 at present.

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