The ink is barely dry on the big tax cut bill, with President Trump signing the Tax Cut and Jobs Act into law 11 days ago. But as investors comb through the details, they’re finding that one industry in particular should benefit strongly – not just now, but in the rest of 2018 and beyond. Banks!
Why? Banks pay among the highest tax rates thanks to a peculiarity of their business. Apple and Google can squirrel away profits offshore for years, but banks need to move money to make money — and that means taxes.
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The big corporate tax cut, down to 21% from 35%, will put banks in the path of a landslide of free cash to invest and, of course, to give back to shareholders.
Fifth Third Bancorp (FITB, Rate “B”), for instance, told investors that it expects its tax rate to fall from an effective 26% to as low as 12.5%, per the Wall Street Journal. That will create a net gain of between $240 million and $260 million. The story goes on to say that some banks will use the extra cash to increase salaries, but most of the extra money will go to bank bottom lines.
In short, more money is more money — extra capital to lend and invest. That should juice the economy and, not coincidentally, push up bank stocks themselves.
I provided you with some potential bank stock investments last week. But now that the tax bill is officially law, I wanted to give you even more high-quality bank names that were already demonstrating strength. The theory: If they were already performing well under the previous tax regime, they should really hit the afterburners now!
I started by combining the power of the Weiss Ratings Stock Screener and our Weiss Bank Safety Ratings. Specifically, to create this screen, I first chose only our mostly highly rated banks. Next, I looked at return on equity — how much a bank earns based on the amount of money placed there by investors. Essentially, a higher ROE means the business is well-run and makes money for investors.
The next sorting criteria was operating margin over the past 12 months. I looked only for banks that were profitable internally, not subject to high structural costs of doing business that make it harder to post a profit.
My next cut was based on size. If you want to benefit from a big corporate tax reduction, you should maximize your potential by focusing mostly on medium-to-large-ish banks. So, I set the market cap range at $500 million to $10 billion. That eliminated the smallest bank stocks that are sometimes illiquid, as well as the mega-cap names that can pose a threat to the entire economy in tough times (like 2007-2009).
Finally, I sorted by year-to-date price change. I wanted to find winners that were already performing, and as a result, should still have legs to run. It’s all about backing solid horses in the gate, those chomping at the bit for a strong 2018.
The resulting screen looked like this:
|Data Date: 12/28/2017|
Carolina Financial Corporation (CARO, Rated “A+”) was one of the top-ranked names. It’s a community bank that operates 30 branches in both North and South Carolina. A strong 45% operating margin means this bank is in great shape financially already, and lower taxes will simply push its managers to grow the business even faster.
Carolina’s double-digit return on equity is a solid indicator of investor reward, too. While the bank’s one-year return is right on the industry average, its three-year total return is well above at 107% and its five-year number is equally impressive at 224%. A tax boost will only help a bank like this keep on doing what it does: Grow for investors.
Meanwhile, Synovus Financial Corp. (SNV, Rated “A+”) is the holding company of Synovus Bank, which operates 248 branches in five southern states. Its almost 43% operating margin and 11% return on equity suggests a solid, profitable bank with prospects for continued strong performance. A year-to-date return of nearly 19% pairs well with multi-year returns at or above industry averages.
Owning quality never goes out of style. Owning quality in a strong market sector that just got a massive tax windfall is very fashionable indeed! So, make sure you use the Screening tools available to subscribers of Weiss Platinum to find the best-quality bank stocks – and sprinkle some of them in your portfolio. If you aren’t yet on board with that service, by the way, you can click here to get signed up at a special rate!