There are lots of things to consider when buying shares in a company, and many of those concerns don't go away once you've made the purchase. Set-it-and-forget-it investments are great, but external factors like policy changes and internal shifts like management shakeups can always change your investment thesis, which is why it's a good idea to keep an eye on all of the companies in your portfolio. In our special premium research reports on key banks in the industry, we outline three areas investors must watch. This is an excerpt from our report on BB&T (NYSE:BBT).
How BB&T allocates capital
BB&T has laid out exactly how it prioritizes its use of capital these days:
- Fund organic growth initiatives
- Share repurchases
As we'll see in the next area to watch, BB&T has done its share of growth through acquisition. And although it's focused on growing out its business organically, its recent history shows BB&T is always on the lookout for an acquisition that fits into its strategy of expanding its sources of revenues and growing in (or adjacent to) its base in the Mid-Atlantic and Southeastern U.S.
Meanwhile, it's notable that dividends are slotted in the No. 2 position ahead of acquisitions. As was the norm in the industry, BB&T slashed its dividends to preserve capital during the financial crisis. But even at its low of $0.15 a quarter, the dividend was meaningful. The bank sees maintaining and raising dividends as a true priority.
BB&T used to regularly buy back shares, but, perhaps chastened by the experience of buying at pre-crisis highs, hasn't meaningfully bought back common shares since the last quarter of 2007. Now, it's considered "a distant fourth option only if the internal rate of return is superior to other options."
2. Acquisition growth
Conservatism can look slow and out of step in good times. But in bad times, conservative players can absolutely feast. That's exactly what BB&T was able to do.
BB&T has engaged in a number of smaller acquisitions to boost its core banking business (e.g., BankAtlantic) and its expanded financial services business (e.g., insurance wholesale units of Crump and benefits consultant Precept).
Perhaps its biggest coup was scooping up not-so-small Colonial BancGroup. At the time (August 2009), Colonial's was the sixth biggest bank failure in U.S. history. Because of its relative strength, BB&T was approved for a sweetheart deal. BB&T acquired all of Colonial's deposits and $22 billion of its $25 billion in assets. Those assets were further protected by a loss-share agreement with the FDIC.
With less obvious opportunities to strike these days, BB&T is refocusing on organic growth driven by a customer "flight to quality." That said, the industry is consolidating, and BB&T has proven to be selectively acquisitive.
3. Diversification of businesses
As CEO Kelly King put it earlier this year, "We are successfully executing a five-year strategy to diversify our balance sheet, decreasing our exposure to higher risk real estate loans and more expensive certificates of deposit, and increasing our focus on less volatile commercial lending and lower-cost deposits. Our emphasis on other income-producing businesses, including capital markets, insurance, specialized lending and wealth management, is adding to our diverse revenue mix."
In other words, on the banking side, BB&T is looking to be more well-rounded in its loan portfolio and to increase its interest rate spreads by lowering the cost of its deposits. In addition, it's looking to diversify itself further beyond regular community banking. We can see what BB&T's already done here:
Anand Chokkavelu, CFA, has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.