How Many Regional Banks Are Investment Grade?

When buying investments, one of the challenges is picking an investment in the top ten percent. There are certainly different ways to determine the top ten, but most of them are too time-consuming. In the case of regional banks, there are 250 regional banks with Seeking Alpha Quant Ratings. To find the top ten percent could be daunting. However, the Quant rating quickly separates the top dogs from the dead dogs. Generally speaking, I am only interested in the top ten of any given category. For today’s analysis, we are going to consider three banks: HBAN, RF, and CFG.  All three have comparable market caps over $20B, with HBAN slightly higher than the other two. We will consider three sources for buy, hold, and sell recommendations. Then you will understand why I sold HBAN to lock in my profits.

The opinions of others can be helpful.

Start with Full Disclosure

Until Friday, I held shares of all three. I had 1,000 shares of HBAN, 100 recently acquired shares of RF, and 200 shares of CFG. HBAN shares, 500 to be specific, were purchased in 2014 and I paid less than $10 per share. More shares were added in the last two years, bringing the total to 1,000. HBAN was paying an increasing dividend, but then plateaued in September 2019. Although the yield is decent at 3.7%, the lack of dividend growth is disappointing. When that happens, I review the sector to see if I need to make changes. In this case, we are looking at regional banks.

Yield is less important than Dividend Growth in most situations.

HBAN Huntington Bancshares Incorporated

The lack of dividend growth since 2019 is disappointing, but HBAN’s share value grew almost 67% in the last year. However, examining HBAN from a five-year perspective reveals that the 5-year return is 64.3%. That is disappointing. With a lack of an increasing dividend, and the lack of covered call options opportunities, I determined I should take my profits and look for alternative regional bank investments.

CFG Citizens Financial Group Inc

I started buying CFG shares in January 2020, adding 25-share lots from January through July 2020. The 200 shares are now worth 31% more than I paid for them. The one-year return was 72.4%, and the five-year return (that I did not gain due to my purchase dates) is almost 94%. Although CFG’s yield is less than that of HBAN, the 5-year growth rate of the dividend is much better than HBAN’s. It is true that CFG has also stopped increasing their dividend, with no increase since January 2020, but I see better potential for additional covered call income and for better dividend growth. Furthermore, CFG has merger agreements with JMP Group and Investors Bancorp scheduled to close this year and in Q1 2022, respectively. I may buy more shares on a price dip. I am watching CFG for their Q3 earnings, to be announced on Wednesday. Several analysts have upgraded CFG’s stock price target to $55-57. Given the current price of $48, this may be the right time to buy.

RF Regions Financial Corp

RF will also be announcing their Q3 earnings this week: on Friday. Just like CFG, stock price targets are well above the current price for the shares. RF also has declared the most recent dividend increase in September 2021 and it comes with a great payout ratio, excellent 5-year dividend growth rate, and 9 years of dividend growth. Like HBAN, RF has been paying dividends for 32 consecutive years. That is a big deal. Furthermore, the 5-year stock price appreciation has been 123%.

Total Return and Dividend Growth are both considerations. Which banks win?

What Are the Ratings?

I usually check three sources for analyst opinions. 1) Seeking Alpha, 2) Fidelity Equity Summary Score, and 3) Weiss Ratings. The last one is more out of curiosity rather than compelling buy-hold-sell advice. What follows are the three ratings stories.

Seeking Alpha Story

Here is where the choice becomes less complicated. Because I think the SA Quant rating is a good way to get a sense of relative value at current prices, RF and CFG are clearly in the top ten, not just the top ten percent. RF is ranked 2 out of 250 regional banks. CFG is ranked 7. HBAN, however, is not even in the top 50%: they rank 145 out of 250. If you are curious, KEY (KeyCorp) is number one. However, from a dividend increase perspective, KEY is much like HBAN. The following help illustrate my reason for selling HBAN and the reason I will be watching for opportunities to add more RF and CFG shares to my IRA account.

Look for the green when investing. Red is at the very least a caution!

Fidelity Equity Summary Score

While ratings are nice, they aren’t the best factor for picking investments. However, in the case of these three, HBAN clearly is out-of-favor compared to RF and CFG. The following from Fidelity’s Active Trader Pro illustrates the divergence.

Fidelity Comparison of Equity Summary Scores for HBAN, RF, and CFG.

Weiss Ratings

Sometimes it is helpful to view the Weiss Ratings for comparison shopping. HBAN currently has a “hold” rating of C. Both CFG and RF have B- ratings, which is a weak buy rating. All this really tells me is that Weiss has not seen any compelling reason to abandon any of the three, but if one has to go, it should probably be HBAN.

It is highly probable that I will be adding to my RF shares and more than likely that I will buy more CFG. I already have a decent slice of CFG. so RF is more of a priority.