I’m Back to Buy More of This Stupid Cheap Bank

It's been a few months since my Special Situations portfolio acquired more stock in TFS Financial (NASDAQ: TFSL  ) , and I'm back now to announce another purchase. The bank remains ridiculously cheap and has plenty of ways to create value for shareholder, including ways that have nothing to do with how the market performs. I pointed all this out in my prior buy recommendation.

TFS Financial is finally free of the regulatory action that prevented the company from freely buying back stock and trying to initiate a dividend. The company's first action after getting out from under regulators was to announce a stock buyback, a move that management had telegraphed for years. And management came out swinging, committing to buy 5 million shares, or about 6% of the approximately 80 million shares with an economic interest in the bank.

With the stock trading around 60% tangible book value, buybacks are an immediately and hugely accretive use of cash. I love to see management make this capital allocation move. Each share that remains then becomes even more discounted. Management has a history of strong buybacks, too.

I estimate that following the buyback – which I suspect is close to completion already – the company will have about $150 million at the holding company that it could immediately use for buybacks. So that could be another 15% or so of the stock that it could repurchase in short order. I'm anticipating another announcement shortly after the completion of this repurchase authorization. And we could hear something next week as the company reports earnings.

But that's only one source of value. The second major source is expanding the balance sheet, and the company is working to put its massive excess capital reserves to work in growing the loan book. The market is just not pricing in growth here. If we see a drastic spike in quarterly earnings, the stock might take off. If not, buybacks will continue at depressed prices.

Finally, management is trying to initiate a dividend that would be approximately 2% at current prices. To do this, they have to get a waiver from the owners of the non-economic interest in the bank, the mutual holding company. The verdict on that should be complete by July 30.

I'm agnostic on the dividend, except to the extent that it encourages investors to buy a stock that they wouldn't otherwise. With the stock trading at 60% of tangible book, it's much more capital-efficient to repurchase stock all day long rather than pay a dividend.

So that's three ways to win with TFS Financial.

Foolish bottom line
So that's why I'm adding more to my position in TFS Financial, even though the stock already comprises 11% of my Special Situations portfolio. On the next market day I'll add another $500 to the position. Interested in TFS Financial or have another stock to share? Check out my discussion board or follow me on Twitter, @TMFRoyal.

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Read/Post Comments (4) | Recommend This Article (10)

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  • Report this Comment On August 17, 2014, at 9:47 AM, JoeBtsflk wrote:

    According to both my stock broker and The Motley Fool, TFSL's price to book ratio is actually 2.2, not 0.6. The current stock price is slightly lower than when the article was written, so that would lower the ratio if anything. Otherwise, their tangible book value has fallen dramatically...SELL!

  • Report this Comment On September 10, 2014, at 3:14 PM, joryko wrote:

    Joe, you just proved Jim's prior articles on TFSL to be perfectly true :) It was 0.6 at the time of this article, it just has to be researched.

  • Report this Comment On October 26, 2014, at 12:33 AM, ozzie wrote:

    Hmmm - I'm with JoeBtsflk . . . goes back several years, and Tangible Assets never exceed $2 Billion, let alone $7 Billion (max) or even $5 Billion (min) that the stock price would have to be to make 0.6 a valid ratio. Jim?????

  • Report this Comment On October 26, 2014, at 12:46 AM, ozzie wrote:

    Sorry - I looked at Jim's comments already posted - per the company's latest 10-Q...


    As of August 4, 2014 there were 303,373,527 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 74.9% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.


    If I understand this correctly, EPS should be multiplied 4x and P/E should be multiplied by 25% to get more accurate numbers. I see why Jim specializes in these kinds of opportunities . . . they aren't so obvious to the average Fool. :-)

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Jim Royal

Jim is a special-situations investor focusing on transactional events (such as spinoffs, recapitalizations, or reorganizations, among others) that create advantageous stock mispricings.

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Related Tickers

8/28/2015 4:00 PM
TFSL $17.00 Up +0.15 +0.89%
TFS Financial CAPS Rating: *****