Posted on July 30, 2022 by Nikolaos Sismonis
When one thinks of their favorite blue-chip stocks, the first names that come to mind are usually giant companies that generate tens of billions of dollars in annual revenue. While it is true that sometimes larger companies enjoy a number of competitive advantages, including a superior moat and economies of scale, the size of a company is not necessarily a critical factor in its quality.
In this article, we look at Community Trust Bancorp, whose annual revenue is just over $225 million. For a stock to be classified as a blue chip, our requirement is that it has at least 10 years of consecutive annual dividend increases. We believe this track record demonstrates the company’s ability to deliver consistent growth and dividend growth even in recessionary conditions.
With 41 consecutive years of annual dividend increases, Community Trust Bancorp has certainly proven its ability to increase its dividend during various periods of difficult economic conditions. As such, we consider it a true blue-chip stock despite its small market cap of just $775 million.
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In this installment of the 2022 Blue Chip Stock Spotlight series, Community Trust Bancorp, Inc. will be analyzed. (CTBI).
Community Trust Bancorp is a local bank with 84 branches in 35 counties in Kentucky, Tennessee and West Virginia. It is the second largest bank holding company in Kentucky, with a current market capitalization of just $775 million.
The company provides a wide range of commercial and personal banking services, as well as trust management activities. These include taking time deposits and demand deposits, issuing loans to corporations and individuals, providing cash management services, issuing letters of credit, renting safe deposit boxes and providing funds transfer services, among others.
Community Trust Bancorp has a balance sheet of $5.4 billion. As of June 30, total shareholder equity was $653.3 million and trust assets under management totaled $3.6 billion, including CTB’s investment portfolio totaling $1.5 billion.
Because of its small market capitalization, Community Trust Bancorp is not included in the S&P 500 index, and thus is not considered a dividend aristocrat, even though it has increased its dividend for 41 consecutive years.
Community Trust Bancorp’s recent results demonstrated the bank’s potential to post solid numbers even in tough trading conditions. Its net interest income for the second quarter of 2022 increased by 2.0%, thanks to loan growth. The bank’s non-interest income fell 7% compared to the prior-year quarter, but the decline was mainly due to changes in the valuation of mortgage servicing rights.
Moreover, the bank increased its loan loss provisions by $0.1 million, compared to a $4.3 million recovery in the year-ago quarter. Overall, as in the previous quarter, the bank faced a tough comparison to its bottom-line results last year, and as a result, its earnings per share fell 15% from $1.34 to $1.14. Still, it beat analysts’ consensus by $0.04. It’s important to note that much of last year’s growth was the result of a reversal of loan loss provisions, and thus investors should expect earnings to decline in 2022. Accordingly, we expect fiscal 2022 earnings per share to be around $4.40, representing a year-over-year decline of 10.9%.
However, this does not mean that the company’s performance is deteriorating.
Source: SEC filings, author
Excluding a record 2021, in which Community Trust Bancorp posted sharp earnings thanks to the write-down of loan loss provisions recorded in 2020, the bank has grown earnings per share by an annual average of 4.3% over the past decade. 4.7% average annual rate for the last five years.
The economy has recovered from the pandemic, and the Fed has begun aggressively raising interest rates this year. This should be a threat to Community Trust Bancorp. However, the one-time reduction in the bank’s tax rate, which contributed to a large part of the profit growth in 2018 and 2019, will no longer be a significant driver of growth.
Therefore, we do not expect the company to accelerate its growth model in the coming years. Taking a prudent approach, we expect Community Trust Bancorp to grow earnings per share by an average of 2.0% per year over the next five years.
On the dividend side, Community Trust Bancorp has increased its dividend per share for 41 consecutive years as a result of sound capital management and a constant focus on shareholder returns. The compound annual growth rate of dividends per share for 10 years is 2.61%. This is not a satisfactory growth rate and, frankly, it barely balances the long-term average inflation. However, investors can take solace in the rising payout and expect that dividends can continue to grow for decades to come if the bank maintains its current prudent management.
Source: SEC filings, author
It’s also worth noting that the lack of more aggressive dividend growth doesn’t mean shareholder value creation isn’t maximized. Given that the company retains a significant portion of its profits, it has been able to increase its equity (book value) at an extraordinary rate over the years.
Source: Presentation for the investor
Competitive advantage and recession outcomes
Community Trust Bancorp proved that it was well managed during the Great Recession. During the worst financial crisis in 80 years, when most banks cut dividends, this bank remained profitable and continued to increase dividends. The 2020 COVID-19 pandemic caused Community Trust Bancorp’s earnings per share to decline by -8%. However, these business figures are better than most other banks thanks to a conservative loan portfolio. To provide perspective, the bank reported average net loan recoveries of just 0.02% over the past four quarters, further demonstrating its overall quality.
Below you can see a summary of Community Trust Bancorp’s earnings per share from 2007 to 2011:
- Earnings per share in 2007 amounted to $2.20
- Earnings per share in 2008 amounted to $1.40
- Earnings per share in 2009 amounted to $1.51
- Earnings per share in 2010 was $1.97
- Earnings per share in 2011 amounted to $2.31
While earnings per share fell 36.4% in 2008, the company quickly recovered. By 2011, earnings per share were well above 2007 levels.
Overall, we think Community Trust Bancorp’s dividend should remain safe even during a prolonged recession. Over the past five years, the company’s dividend payout ratio averaged about 40%.
Based on our expected earnings per share for fiscal 2022 and the current dividend per share rate, the payout ratio is also exactly 40%. Despite ample scope to increase the dividend at a much faster pace, we believe the bank will maintain the payout ratio close to current levels as part of its prudent strategy.
Valuation and expected return
Community Trust Bancorp currently trades at a price-to-earnings ratio of 9.5, which is below its 10-year average price-to-earnings ratio of 12.6. Despite consistent profitability and overall quality, the market is likely to expect minimal growth in the coming years, which explains the discount. However, we believe that yield-oriented investors are likely to value the company’s 4.0%, especially in the current volatile macroeconomic environment. Coupled with the fact that rate hikes should benefit the company, we believe the stock’s valuation could fall to 12.
If the price-to-earnings ratio increases from 9.5 to 12, future returns will increase by 4.7% per year over the next five years. Combined with our EPS and DPS growth rates, as well as the current dividend yield, we forecast an annualized yield of 9.8% through 2027.
Accordingly, we rate Community Trust Bancorp a Buy.
Community Trust Bancorp is a well run bank. It accelerated its growth in 2018 and 2019 thanks to higher interest rates and a lower tax rate. It also posted record profits last year thanks to a recovery in loan loss provisions as the economy recovered from the pandemic. While net income will slow this year due to the lack of last year’s growth factor, fiscal 2022 should be another year of strong bottom line performance.
The company also has a healthy payout ratio, which should support dividend payments and possibly dividend growth even if earnings are significantly affected. As such, Community Trust Bancorp qualifies as a blue chip that income-oriented investors can count on, especially given its exceptional dividend growth performance.
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