Mellon Overview
...it's been around longer than Coca-Cola
by Jeff Fischer (JeffF@fool.com)


Alexandria, VA (August 6, 1998) --From his pared-down list of eleven bank stocks, Dale favored a small handful represented by Norwest, Mellon Bank, Fifth/Third Bancorp, First Tennessee, and U.S. Bancorp. Dale's first choices are Norwest and Mellon Bank. Unfortunately, Norwest's substantial fees for its dividend reinvestment plan leave us feeling as cold as an empty safe, so, unless it proves to be the absolute King of Kings in the industry (or until we know exactly how its new plan will operate once its merger with Wells Fargo is complete), we'll likely go elsewhere to do our investment "banking."

Because Dale has focused on Mellon for his past several columns, I'll begin this review with Mellon. As explained on Tuesday, and as always, Drip Port purchases are a team decision -- each buy must be fully understood and supported by every Fool involved in the portfolio. Dale favors Mellon above all others but for Norwest. After Dale and I reach an agreement (whatever it might be, it could very well be Mellon), the next step is asking you for your opinions. Although, of course, your opinions are welcome and accepted as a vital part of the Fool on the message boards every day, at all times. Including now. We'll just ask you for more "formal" opinions.

So, onto Mellon Bank (NYSE: MEL).

Dale is incredibly complete in his financial and numerical analysis. I can link to Dale's work right here (and I just did) and provide all of Mellon's analytical numbers that matter -- numbers that you can't easily find anywhere else, for free or otherwise. Since Dale has the numbers covered so well, we'll review the business history and the current business (which Dale also summarized in the column linked at the beginning of this paragraph) in order to understand where this company has been and where it might be going.

Mellon Bank is -- there's no polite way to say this -- damn old. It was founded in Pittsburgh just four years after the end of the Civil War, in 1869, by Judge Thomas Mellon. In the early days, the company financed the businesses of Alcoa, Westinghouse, and Bethlehem Steel, but its most fruitful investment was in a scrappy little company that became Gulf Oil.

In 1929, Mellbank was formed as a holding company for various Mellon bank businesses. The company was able to grow consumer deposit accounts even during the Great Depression because its name was so strong in the Pittsburgh area. Mellon was called Mellon National Bank until it merged with Union Trust Co. in 1946 to form Mellon National Trust & Bank. Mellon National Corp. was created in 1972 as a larger holding company, and the current Mellon name was put in place in 1984.

Mellon sold many noncore businesses in the early 1990s and began to focus on (and acquire) a diversified line of targeted businesses. Mellon breaks itself into four units: Consumer Fee Services, Consumer Banking, Business Fee Services, and Business Banking. In 1993, Mellon acquired Boston Company, an asset management division, helping to round out its business on the corporate and institutional asset management side. Next, Mellon went big-time into mutual fund management, buying Dreyfus in 1994.

In 1996, the company entered the auto-financing business -- lucrative business that it is. The company also acquired a leasing unit of Ford Motor Co. in order to create a commercial leasing company. In 1997, Mellon formed a joint venture with Canadian Imperial Bank of Commerce and tackled institutional and pension custody services in Canada. It also acquired a business consulting company, another investment management firm, and the commercial services business of Bankers Trust. This final move made Mellon the second-largest U.S. servicer of commercial mortgages. Next, the company entered the discount brokerage business by slurping up Pacific Brokerage Services (which used to advertise on the Fool, incidentally). It put this service under the Dreyfus name.

Despite its numerous business lines, Mellon's primary business is still providing consumer and corporate banking and lending. It has a presence in Delaware, Florida, Maryland, New Jersey, and Pennsylvania, with over 450 branches.

It's easy to see why Dale likes this diversified company so much. Mellon has several bases covered and it covers all of them well. In fact, nobody is stealing a base from Mellon -- if you do business with this company, it's making money from you. Mellon's efficiency and value is recognized by others in the financial industry as well. Dale mentioned the $24 billion takeover bid from Bank of New York this year, which Mellon outright rejected. Mellon currently has a market capitalization of $16.5 billion.

In 1997, Mellon did $2.7 billion worth of loan interest and fee business (revenues) and $2.4 billion in service fee revenue. The company has grown earnings per share an average of 21.5% annually over the past three years, and its dividend has grown an average of 13.8% per year, compared to 8% and 4.4% for the industry.

Its return on equity (ROE) and return on invested capital are well above the industry averages as well, with Mellon's ROE being 19.6% vs. 15.3% for the industry. Dale's more detailed performance measures, such as ROE2, actually put this number above 22%.

Mellon's dividend reinvestment plan, which Dale touched on yesterday, requires one share to start and you can invest $100 to $50,000 per year, with the minimum investment being $100 per month. In the future, we'll be alternating our monthly investments (by company) anyway, because once we own more than five stocks we can't simply send $20 to each one every month, because some have higher minimums. So, we could instead send Mellon $100 every four months, for example, Intel and J&J $50 apiece every two months, and so forth. The Mellon plan has no fees except for selling, but does only allow dividend reinvestments to take place after a shareholder owns at least five shares of stock (thanks to the Fool, Dennis, who emailed this info). If you own less than five shares, dividend checks are sent to you (they can be reinvested, of course, and this is only a short-term and minor problem).

Mellon currently yields 2.10%.

For more in-depth information on Mellon, please revisit Dale's Mellon columns in the Drip Port archives. The more that we all know about the business, the better we can compare it to others, as Dale has done. One final good point about Mellon: we could call it 'ol Mel for the next several years. Fool on!

--Jeff Fischer

FoolWatch -- It's what's going on at the Fool today.


8/6 Close

Stock Close Change CPB $51 3/16 - 13/16 INTC $87 +2 7/8 JNJ $75 1/2 + 9/16
Day Month Year History Drip 1.59% 0.32% 12.72% (4.01%) S&P 500 0.76% (2.77%) 12.28% 14.54% Nasdaq 2.32% (2.29%) 16.50% 14.79% Last Rec'd Total # Security In At Current 06/30/98 3.017 CPB $54.259 $51.188 07/01/98 9.724 INTC $80.239 $87.000 07/07/98 6.010 JNJ $69.708 $75.500 Last Rec'd Total # Security In At Value Change 06/30/98 3.017 CPB $163.70 $154.43 ($9.27) 07/01/98 9.724 INTC $780.21 $845.95 $65.74 07/07/98 6.010 JNJ $418.95 $453.76 $34.81 Base: $1800.00 Cash: $386.05** Total: $1840.19

The Drip Portfolio has been divided into 76.682 shares with an average purchase price of $23.474 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
7/22/98: Sent $60 to buy more CPB, and $40 to buy more JNJ.