Since January 1, 1980, the S&P 500 has returned about 1,820%. The Dow Jones Industrial Average has returned just more than 2,000%. Not bad by most standards. Most standards that don't include a direct comparison with M&T Bank (NYSE:MTB), that is.
Welcome to the M&T Bank moon rocket
This regional bank has returned more than 23,500% over the same period. Its performance has been absolutely explosive, leaving the broader markets and other top bank stocks in the dust.
Wells Fargo (NYSE:WFC), the most valuable bank in U.S. history, "only" returned 4,970% during the same period. US Bancorp (NYSE:USB), another of the very top banks in the U.S., managed 6,300%. That's still a staggering performance, and it pales in comparison to the run that M&T has been able to put together.
To understand exactly what has driven this monumental result, we'll break it down with these five charts.
1. The bank has gotten bigger, but not that much bigger
With this kind of stock appreciation, you'd expect the balance sheet to grow in size, as well. M&T Bank has grown substantially, but less than you may think.
M&T first grew above $10 billion in total assets in 1993, just before the bank's growth accelerated rapidly in the late 1990s. At year end 2013, the bank held more than $85 billion in total assets, a figure that has since increased to more than $97 billion as of September 30, 2014. When (and if) M&T concludes its pending merger with Hudson City Bancorp (UNKNOWN:HCBK.DL), the bank will add another $37 billion in assets overnight.
That's tremendous growth; but as the chart below demonstrates, it's nothing in comparison to growth at other banks.
2. Profits are way up, as well, but again, less than you'd expect
Just as with growth in total assets, we should expect to see a massive growth in profits for a stock that has returned more than 23,500%. As expected, then, M&T Bank has increased profits at a truly impressive rate.
For the 12 months ending 12/31/1988 (the earliest available data courtesy of S&P Capital IQ), M&T reported $44.5 million in profits. For the year ended December 31, 2013, the bank reported profits of $1.1 billion. That's 26.5 times the annual profit reported in 1988.
However, when we again compare that growth to other top U.S. banks, M&T looks a whole lot less impressive. During the same period of time, both Wells Fargo and US Bancorp have increased profits at a far faster rate on a relative basis.
3. The markets don't value the bank at that much of a premium, either
When it comes to bank stocks, one of the most common metrics used for valuation is the price-to-book value ratio. Generally speaking, a bank that trades with a price-to-book ratio less than one is either very deeply discounted, or has significant problems on its balance sheet. Banks that trade above two times price to book are generally considered expensive, or commanding a very high premium.
M&T has traded in a relatively tight trading range in terms of price to book during the past 35 years, moving up and down with the broader industry, but never trading for a particularly large premium or particularly deep discount. Since 2010, the stock has traded between about one and 1.5 times price to book.
US Bancorp and Wells Fargo both trade at a higher premium than M&T, a fact that's been mostly consistent going back for the past 15 years.
Before we move on to charts four and five, let's stop and summarize what we know so far. M&T Bank's stock has returned a ridiculous 23,500% since 1980. The bank has grown its balance sheet and its profits handsomely during that time, but not nearly as much as other banks whose stocks rose far less. And those other banks actually trade at higher multiples to M&T Bank.
Now that we're adequately confused, we can finally reveal the secret sauce behind M&T's incredible 35 year run.
The biggest difference between M&T and other stocks during this time period is management's capital allocation decisions. Let's start the discussion with dividends.
Our fourth chart shows the dividends paid on a per-share basis on a trailing 12-month basis. YCharts defines this ratio thusly:
Sum of common dividends per share over the last twelve months. For instance, if a company pays $4 dollars [sic] in dividends in Q1, 5 dollars in dividends in Q2, 6 dollars in Q3, and 9 dollars in Q4, TTM Dividends Paid will show $24 dollars.
In other words, this chart shows the actual dollar amount, per share, of dividends paid for each trailing 12-month period. By this measure, M&T outshines both US Bancorp and Wells Fargo.
Having a shareholder-friendly dividend policy is only part of the story, and to be honest, it is a minor one. Looking at the dividends from a yield perspective, the three banks all pay out between 2.1% and 2.6% today, and have reported similar yields for years. The real difference maker that has propelled M&T to 23,500% gains, four and five times more than US Bancorp and Wells, is shareholder dilution.
Yes, Wells Fargo and US Bancorp have grown much, much larger than M&T Bank. And yes, those two banks have increased profits at a much faster pace, as well. But to accomplish those gains at that pace, they have had to issue massive numbers of new shares.
M&T Bank, on the other hand, has taken a different tack. Since 1984, M&T's total shares outstanding have increased by about 130%. By comparison, Wells Fargo's shares outstanding have increased by 670%, and US Bancorp has seen an increase of 902%!
Easy to miss
It's pretty easy to overlook capital allocation decisions when you analyze a stock. Most of us are satisfied to give a quick glance at a company's dividend and yield, and then move on to other considerations.
There is just something satisfying about seeing a company grow assets and net income quickly and massively. That's what business is all about... right?
It is, but only when that growth provides a benefit to shareholders. M&T Bank management has chosen over the years to forgo some of that growth and, instead, focus on avoiding dilution and taking care of shareholders.
The results, I think, speak for themselves.