Wells Fargo is one of the most respected and most profitable banks in the world and it might have an European cousin in Intesa SanPaolo (ISP.MI). I will try to explain shortly why and evaluate it as a possible Dividend for life.
Intesa SanPaolo is the biggest Italian bank by capitalization (around 30B€) and by Net Profit (around 3B€ Net Profit expected by analyst for FY2016).
According to the latest European Stress Test, it is one the most solid and more capitalized bank in Europe; however as all the Italian banking sector is under big pressure to be reorganized (more money and less bureaucracy is needed), ISP share price has been suffering a big decline in the latest 18 months (more than 50%).
This gives us a fantastic entry point, considering the strong dividend stream expected in the next years.
The answer is simple SUPER high Dividend for the next 5 years. The dividend will grow very fast in the coming year at least 10% of current prices (today ISP is close to 1.8-1.9€ while next year dividend is 0.18€) and 13% for 2018 (0.22€ based on latest business plan).
Few reasons makes me believe this could be possible:
As per the graph above showin the latest stress test, it’s a very solid and healthy bank
- better than its most important peers
- better than ECB minimum requirement for 2018
- the company can now focus on distributing dividend to shareholders
Its stable revenue generation reminds me the one from Wells Fargo
- Limited exposure to investment banking
- Strong commissions based revenue
- And increasing Insurance business
Opportunity can be captured from weak competitors that are now suffering in their recapitalization or reorganization
- As Peter Fischer teaches us, pick always the best, the strongest and the most efficient of a struggling industry
- European Banking is under pressure and the best ones not only will survive but also will get bigger and stronger
- Intesa SanPaolo will be one of them
Management, always prudent, created strong fundamentals and a very professional team
- On top, the current CEO is very shareholder friendly:
- avoiding any expensive acquisition
- focusing in making business more efficient and profitable
- distributing more and more money to its shareholders
- Free Cash Flow yield higher than 10%
- Even if I am very demanding with 10% free cash flow yield, Intesa passes this condition easily as it will earn way above 0.20€ this year in Free Cash Flow
- This will allow the company pay this massive dividend of 0.18€
- Debt or Financial solidity
- As mentioned, Intesa is one of the healthies bank in Europe
- Not only they passed the stress test, but they are above the threshold for 2018
- All the money exceeding this threshold can be used for dividend
- Strong and trusted management
- Historically Intesa management (always prudent) saved the company from scandals and financial issues
- Since 2014, they put in place a business plan to compensate shareholders
- Margin of safety
- Many analysists think alike, considering ISP one of the best options in the European spectrum
- Today target price is 2.62€ more than 40% above current prices
Evaluate the opportunity
If everything goes well, I would like to keep Intesa for the next 10 years and compounding their dividends giving enough time for interest and inflation to come back and push Banking sector earnings.
At current value, Intesa is an opportunity, considering dividends and price revaluation. The chart below could resume potential return:
This chart shows that in 10years you could be able to collect around 20% from current prices.
But it’s not over yet. If you wanted to reinvest the dividend, it could be even higher:
More than 30% of what you invested originally
- for example: from 2.000€ with 1.000 shares, you could receive 575€ of net dividend
- Invested capital could achieve 1.700 shares and 12.000€ (6 times more)!!!
The beauty of a dividend investor is that if ISP share price will not increase that much, you could increase your yearly dividend even more. In case the company keeps paying the dividend, the slower its share price grows the easier is for you to collect more shares and increase your dividend even higher.
Disclosure: I am long ISP