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The Next Blue Chip Stocks: Regions Financial Corp.

By Matthew Frankel, CFP® – Oct 11, 2014 at 8:01AM

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Regions Financial Corp. may have a long way to go if it wants to become a "blue chip," but it's definitely doing everything right in the meantime.

Regions Financial (RF 0.76%), also commonly known as Regions Bank, is one of the larger U.S.-based banks, with about 1,700 branches and about $120 billion in assets. Regions is a member of the S&P 500, and is one of the largest regional banks in the U.S., serving customers in 16 states in the South, Midwest, and in Texas.

Source: Wikipedia

After a rough couple of years during the financial crisis, Regions has rebounded quite nicely. The bank is profitable, well-capitalized, and has done a great job of growing its core business while shedding noncore assets. And the company is once again returning a substantial amount of capital to shareholders in the form of dividends and share buybacks.

So, is Regions on its way to becoming a blue chip stock? Let's take a look and see.

What makes a "blue chip" stock, and does Regions fit the description?
A "blue chip" is generally defined as a large, financially stable company that has been around for a long time. Most blue chips have common characteristics, such as a solid record of dividend payments and increases, and are usually a member of a major index, such as the Dow Jones or S&P 500.

Many blue chips are among the most well-known companies in their sectors, and generally have a market capitalization in the billions.

Regions fits some, but not all, of these criteria. The company has a market capitalization of about $14 billion and is included in the S&P 500, as I mentioned earlier. However, due to the financial crisis, Regions' record of dividend payments isn't exactly flawless, and the company definitely has some growing to do in order to become a sector leader.

Growth and strength
At first glance, it may look like Regions is actually losing market share. After all, the company's assets declined from a peak of $146 billion to about $119 billion today. However, much of this is due to poor performance during and after the financial crisis, as well as the sale of certain assets, like the Morgan Keegan investment banking division.

In several ways, Regions is actually growing in very positive ways. For example, the bank's "demand deposits", which include checking and savings accounts, have more than quadrupled in the past 10 years. And, the bank's portfolio of commercial loans has nearly doubled in that time.

Regions Financial Growth 2004-Present | Create Infographics

So, while the bank's total assets have fallen over the past few years for reasons like having fewer mortgages on the books, the company has done a good job of growing its customer base and core assets. In fact, as you can see from the graphic, total assets are higher than a decade ago, even after purging some assets in the wake of the crisis.

And the bank has become much stronger since the financial crisis. Federal banking regulators require Tier 1 capital and total capital levels of 6% and 10%, respectively, and Regions handily tops these at 12.5% and 15.3%. At the end of 2008, Regions had Tier 1 capital of 8.4% and total capital of just 10%, so there has been significant improvement.

Dividends and buybacks
Although Regions' dividend record took a hit during the financial crisis, the company is certainly making a solid effort to return capital to its shareholders.

The dividend was cut drastically in 2009, and in 2010 and 2011, just one penny per share was paid out. However, in the few years since, Regions has raised the payout several times, and in 2014 doubled its payout to $0.20 per share, which is about a 2% yield.

And, the company has been increasing its buyback program. In fact, analysts expect buybacks of about $350 million in 2014, which, when combined with the dividends, will translate to about half of the company's profits being returned to shareholders, which is actually a very healthy level.

Will Regions become a blue chip?
I think it's pretty safe to say that Regions is not a blue chip stock yet -- not even close. However, that doesn't mean it'll never get there.

If the bank keeps doing what it's doing for another decade or so -- focusing on growing its core businesses, staying well-capitalized, and making shareholder returns a priority, Regions could definitely develop into a blue chip stock.

Matthew Frankel owns shares of Regions Financial. The Motley Fool has no position in any of the stocks mentioned. 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.

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