United Bankshares: Expansion in Atlanta promising for this king of dividends (NASDAQ: UBSI)

United Bank Stocks (NASDAQ:UBSI) is a financial holding company operating primarily in the community banking and mortgage banking segments. Founded in 1839, it’s headquartered in Charleston, West Virginia, but as we’ll see, it’s looking to expand. its operations in other states as well.

The particularity of this bank is that it has distributed increasing dividends for 50 consecutive years. So we’re talking about a dividend king. Additionally, the dividend yield is also quite high, 4.58%, which is why I think it is worth analyzing it in more detail.

Finally, its financial situation is solid and the acquisition of Piedmont Bancorp looks rather promising. It is currently trading at lower multiples than in the past, so there is potential for upside.

Acquisition of Piedmont Bancorp

The acquisition of Piedmont Bancorp was announced about a month ago, will be financed by issuing new shares and was valued at a total of $267 million; This is UBSI’s 34th acquisition. But why did management choose to buy this small bank? The reasons are numerous, but the main one concerns the geographical area in which Piedmont operates.

Piedmont branches are primarily located in Georgia, a state in which UBSI had no exposure. Most of them are notably located in Atlanta, one of the fastest growing capitals.

In fact, beyond its busiest airport in the world and a booming real estate market, the country has great potential in terms of demographics. From 2024 to 2029, the population is expected to grow 4.50% per year, more than Georgia and more than the entire United States. Operating in a market where there is population growth is essential for a bank, and Piedmont is UBSI’s anchor point to interface with this market.

The second reason why this bank was bought is linked to its rather solid fundamentals.

Total assets increase year over year, as do loan yields. Of course, the cost of deposits has also increased over time, but the net interest margin remains very high at 4.19%. ROAA is 1.36%, ROATCE is well over double digits.

Given such high profitability, one would expect a propensity of the bank to lend money to unreliable individuals/companies in order to obtain a higher return, but this is not the case . In fact, the NPA/Assets is 0%.

Overall, Piedmont is a small company that was started recently (2008) but has built a valuable business in a short period of time. It operates in a growing geographic area, and this is its main strength. Personally, I consider this acquisition positive for the long-term growth of UBSI, but for completeness it should be noted that Piedmont was not paid little.

• Based on expected EPS in 2024 and 2025, the respective FWD P/E at the time of acquisition was 9.70x and 8.80x.
• Based on Q1 2024 TBV per share, price/TBV per share was 1.45x.

We are not talking about such low multiples for a bank of this size, particularly with regard to TBV. It is probably the net interest margin above 4%, coupled with the absence of non-performing assets, which has pushed up its valuation.

Finally, Piedmont represents only one of the many acquisitions made by UBSI; in fact, the company expanded into other geographies by purchasing the most profitable local banks. In the years to come, the list could grow.

Financial data and valuation

UBSI is a fairly strong bank and has demonstrated its ability to cope even with a difficult macroeconomic environment like the current one. The rapid rise in rates that began in 2022 put a strain on the net interest margin, but it nevertheless remains quite high.

It is now 3.44%, not so far from 3.63% at the start of 2023: the increase in the yield on net loans has almost managed to offset the increase in the cost of deposits.

The outlook for the whole of 2024 is quite modest: in fact, loans and deposits are expected to grow between 5% and 5%. Net interest income is expected to be between $900 million and $915 million, assuming two rate cuts of 25 basis points each through the end of the year. At the same time, the net interest margin is expected to remain stable and is not expected to improve.

In other words, 2024 will definitely not be an exciting year for UBSI, but the most important thing right now is not to deteriorate in terms of profitability and maintain high capital ratios. After all, even if recession is no longer a recurring theme, let’s not forget that in the short term the economy is still in a complex period: rates remain high, inflation has not yet been overcome and Mortgage loan applications are at historic lows. .

From a medium-term perspective, the acquisition of Piedmont could increase EPS, in fact it should have an impact of +7.60% on 2025 EPS and +8.30% on 2026 EPS. of the capital, the acquisition will generate a profit of 3.50% dilution on TBV, recoverable in approximately 2.8 years according to management expectations.

Overall, UBSI will face challenges in 2024, but absent a recession, I remain optimistic about its performance in the years to come. The acquisition of Piedmont will pay off next year.

Finally, the current valuation of UBSI seems quite reasonable.

The FWD P/E is only 12.46x, about 10-15% lower than its historical average. It was certainly cheaper a few months ago, but it’s still at a discount.

As for Price/TBV per share, we are at rather low levels. As you can see, this bank has often had a multiple greater than 2x, today the market estimates it to be worth no more than 1.46x. Personally, I don’t think UBSI has deteriorated so much over the last few years to justify such a drop in valuation. At a 2x multiple, based on current TBV per share, the fair value is $43.10, representing 36% upside potential.

Dividend Analysis

As mentioned in the introduction, dividend is the hallmark of this bank, in fact it is the king of dividends.

It is very rare to find a bank with this characteristic, because it means having successfully withstood all the recessions of the last 50 years. In other words, the UBSI was not stopped by double-digit inflation, nor by the bursting of the .com bubble, nor by the Great Financial Crisis, nor by a global pandemic. Such consistency cannot go unnoticed by dividend investors.

The only problem is that the growth rate is too low; therefore, you cannot rely on performance and cost. The current dividend yield is 4.58 percent, and you probably won’t be able to expect much more in the next 10 years. At most it can achieve a return on cost of 5.50%, but no more.

For those looking for reliable passive yield, UBSI may be a good option to consider, but for those looking for dividend growth, it’s best to look elsewhere. The reason I consider this a buy is because I currently see capital gain potential; the dividend is a plus.

If I were to base my rating solely on the dividend yield, it would be a holding back at most, since the Treasury bond yield is about the same, but with zero risk.

Conclusion

United Bankshares is an expanding company seeking to tap into new growth markets. Atlanta is a city with great demographic potential and a thriving real estate market, which is why I understand management’s desire to establish a presence in this sector. The acquisition of Piedmont was not cheap given the Price/TBV per share, but this bank probably deserved a premium given its asset quality and profitability.

UBSI’s 2024 won’t be exciting in terms of growth, but that’s a problem for almost all banks. Mortgage applications are at an all-time low and few want to pay 8-9% interest. From the first reductions, the cost of deposits will decrease and allow the net interest margin to recover.

The dividend, while low in growth, has proven to be a certainty over the past few decades, and as at current prices UBSI looks quite cheap, I think a Buy rating is reasonable.