ALEXANDRIA, VA (August 18, 1998) --In the wake of the collapse of banking stocks in the early 1990s, shares of Fifth/Third Bancorp (Nasdaq: FITB) have gained 34.7% annualized over the last five years. That handily smushes the S&P's impressive 22% annualized return since 1992.
Over this time, Fifth/Third Bancorp grew earnings per share by comparison only 16% annualized (though admittedly straight earnings are a less important valuation measure by itself when it comes to financial stocks). Still, this fact reiterates how buying stocks at an attractive valuation can (and usually does) make a world of difference in your long-term investment performance. Most financial companies were dirt cheap in 1991. Much thanks to this, Fifth/Third's stock gained 35% annually over the following five years -- or more than twice its annual earnings per share growth rate. Mellon Bank (NYSE: MEL), by contrast, has gained 34.6% per year over the same period, while its earnings per share grew 21% annualized.
Enough about recent history. There's plenty of future value to search out, and Dale has us focused on a list of five financial companies -- probably none of which would serve us wrong in the long run. Having recently reviewed Mellon, today we'll tackle Fifth/Third Bancorp.
Yesterday we hinted at the company's interesting history. Fifth/Third Bancorp first opened its doors in Cincinnati as Third National Bank in 1863 inside -- no, you couldn't guess this -- a Masonic temple. Its purpose was to serve the Ohio river trade, which at the time consisted largely of raccoon tail hats (or so grammar school might teach us). In 1871, the company acquired the Bank of the Ohio Valley. In 1908, the company consolidated with Fifth National, forming Fifth Third National Bank of Cincinnati.
The company's name is derived from the two street names of its original locations -- the first being on Third Street, and the bank that it later joined being on Fifth Street (the Masons were creative in their naming of streets).
In the early 1900s, the company consolidated with Union Savings Bank and began to open more consumer branches. In 1919 alone it acquired the assets and offices of six banks and thrifts, operating all of them as branches. Soon before the Great Depression the company merged with Union Trust Company, a move that (luckily) helped the new company survive the ensuing depression. It acquired three more banks (probably at bargain prices) between 1930 and 1933, but soon after that FDR's bank regulation acts were passed and began to limit further acquisitions.
In the mid-1950s the company grew its consumer banking services, increasing locations and its hours of operation and adding other conveniences. In the 1970s, Fifth/Third began to focus on consumer loans above and beyond commercial loans, and it launched ATMs and telephone banking services. The company foresaw the coming sweep of technology and began to move into the data management and information services business. That was a smart move. As of this year, this segment of business accounts for a quarter of revenues, and it's a high-margin business.
As deregulation began to take place in the 1970s, the company began to acquire more small banks (adding to branches) and finally moved beyond its Ohio origins. Now with 480 locations spread over six states, Fifth/Third's core business amounts to consumer and business banking, investment management (mutual funds and the like), and data processing.
Fifth/Third is one of the most respected companies in its industry due to the efficiency of its management in running the business and its very consistent growth. In fact, the company is one of the few financial firms to be honored on a recent list of 40 companies that have grown earnings per share every year for the past 20 years. Also on the list is our own Johnson & Johnson (NYSE: JNJ), as well as Coca-Cola (NYSE: KO).
Due to its successful past and the market's love of its management, Fifth/Third receives a relatively high valuation. The stock trades at 38 times earnings (P/E) and yields 1.30%. This P/E is considerably higher than the 20 P/E multiple at Mellon Bank, and is well above the industry's average P/E multiple of about 20. Mellon's yield is 2.3%, and industry's average yield is above 2%. Is Fifth/Third's higher valuation merited? Well, Mellon has grown earnings more quickly than Fifth/Third over the past five years, but Fifth/Third has grown its book value from $5.80 to nearly $10, while Mellon's book value has grown from about $12 to $14. Of course, acquisitions can have something to do with this, so more important are the overall returns on investment that each business achieves.
Mellon achieves higher return on equity than Fifth/Third (19.5% vs. 17.8%), but a lower return on invested capital (10.7% vs. 12.6%). It serves to note that both beat the industry averages handily on both measures. Mellon is arguably the better diversified company of these two and at a more palatable valuation with a stronger dividend yield. (By the way, for more on stock valuation techniques and performance measures, please visit the Fool's How to Value Stocks area, as well as Dale's financial stock terms linked in the top right of this page.)
So which company wins? Based on current valuation and diversity of business, I would initially choose Mellon (though only tentatively) over Fifth/Third. As we investigate our three other bank companies, more insight into all five might change our minds. Right now, though, Dale also favors Mellon.
Tomorrow we'll consider First Tennessee (Nasdaq: FTEN). In the meantime, for a recent article by Dale on the attractiveness of banking stocks, please read his "Fool on the Hill" column from last Friday in our Evening News. And finally, tonight's Cash-King column covers Intel.