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

TFS Financial remains way underpriced.

Jul 24, 2014 at 2:11PM

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.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Jim Royal owns shares of TFS Financial. The Motley Fool owns shares of TFS Financial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers