Please ensure Javascript is enabled for purposes of website accessibility

The Ultrarich Have $13 Billion at this Offshore Bank: Here's Why You Should Buy

By Jason Hall - Oct 26, 2019 at 6:02AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Bank of N.T. Butterfield may not be a household name for most people, but it's an institution for offshore banking. It's also cheap and pays a very high dividend yield.

The Bank of N.T. Butterfield & Son Limited (NTB -1.40%) doesn't exactly roll off the tongue. Chances are, it's also not a bank that most people have ever heard of -- and for good reason since it doesn't do business with Main Street. Butterfield has its core operations in Bermuda, the Cayman Islands, and the Channel Islands Jersey and Guernsey. 

It's also been in business for more than 160 years, and with $12.6 billion in deposits, it's well-known among the well-to-do and growing its presence. It's also less than five years into its life as a public company and still relatively below the radar of most investors. 

Wealthy woman getting out of a car on the runway, with a private jet and red carpet in background.

Image source: Getty Images.

But when you look beyond the bank's relative obscurity with retail investors, you'll find a high-quality business that's well run, very profitable, and undervalued. It also pays one of the highest dividend yields you'll find from a bank. Keep reading to learn more about this easy-to-miss offshore bank that should probably be in your portfolio. 

Butterfield is exceptionally profitable

Butterfield's status as an offshore bank might make some investors look at it askance. After all, most people associate banking in the Cayman Islands or Bermuda with tax avoidance, at best, and illicit activities, at worst. However, the reality is more straightforward. More individuals and businesses now own assets or conduct business across many borders, and having established banking relationships in these localities simply makes things easier. 

Butterfield has proven exceptionally good at conducting this business in a very profitable manner. Since going public in late 2017, it has delivered exceptional returns and has grown earnings sharply:

NTB Return on Equity (TTM) Chart

NTB Return on Equity (TTM) data by YCharts.

For context, most bank stock investors will tell you the benchmark targets are 10% and 1% on return on equity (ROE) and return on assets (ROA), and Butterfield simply blows past those metrics. Combine the strong returns it earns with solid operations, and Butterfield generates very strong earnings. 

It shares those profits with investors, too

Soon after going public less than four years ago, Butterfield implemented a dividend. It has increased the payout three times, raising it by 340%. Over the same period, earnings per share have increased 153%. Going forward, investors shouldn't expect such aggressive dividend growth; the reality is, it's not sustainable to continue growing the payout more than twice the rate of earnings growth. 

However, the dividend is still very secure, with a payout ratio -- the percentage of earnings paid in dividends -- below 50%:

NTB Dividend Chart

NTB Dividend data by YCharts.

At recent prices, Butterfield's dividend yield is 5.4%, one of the biggest yields you'll find from any bank. 

Butterfield is cheap

At recent prices, Butterfield shares trade for less than 9.4 times trailing earnings. Not only is that on the lower end of the multiple investors have paid for it since going public, but a single-digit earnings valuation for this bank is just plain cheap. 

Moving over to book value -- how much its shares trade for compared to the carrying value of its assets -- it's also on the lower end of the range it has traded for. However, at nearly 1.8 times book value, it doesn't look as cheap as its earnings multiple.

NTB PE Ratio (TTM) Chart

NTB PE Ratio (TTM) data by YCharts.

Generally speaking, 1.5 times book value is often considered a good benchmark for banks. But here's the rub: You can't really look at Butterfield's book value through the same lens as most other banks. Let's go back to its ROE and ROA to help explain why, using JPMorgan Chase (JPM -0.84%):

NTB Return on Equity (TTM) Chart

NTB Return on Equity (TTM) data by YCharts.

JPMorgan is one of the best-run, best-regarded banks in the world. And as the chart above shows, it also outperforms the returns benchmarks of 10% and 1%. However, Butterfield's returns leave even one of the world's best-run banks in the dust. 

That's not to say that Butterfield is the better bank. It's a difference in their core businesses. Simply put, Butterfield should generate higher returns, and those higher returns should also be reflected in its valuation. Today, that valuation doesn't reflect the returns or the earnings power of Butterfield's assets and operations.

Put it all together, and investors would do well to add Butterfield to their portfolios. Between its strong business, cheap valuation, and high yield, it looks like a great way to grow your wealth with a bank that caters to the world's ultra-wealthy. 

Jason Hall owns shares of Bank of N.T. Butterfield & Son. The Motley Fool owns shares of and recommends Bank of N.T. Butterfield & Son. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Bank of N.T. Butterfield & Son Stock Quote
The Bank of N.T. Butterfield & Son
NTB
$34.56 (-1.40%) $0.49
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$122.59 (-0.84%) $-1.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.