Hello, this is the first text translated from Finnish to English.
Starting a new series where I aim to share thoughts on investment opportunities that I consider adding to my portfolio, and occasionally selling. The first company in focus is State Street Corporation (STT).
Here is a description of what STT is:
State Street Corporation offers a range of financial products and services through its subsidiaries to institutional investors worldwide. The company provides investment servicing products and services, including custody, accounting, regulatory reporting, investment, and performance analytics; middle-office solutions, such as IBOR, transaction management, loans, cash, derivatives, and collateral, accounting, client reporting, and investment analytics; foreign exchange and other trading services; securities finance and enhanced custody products; deposits and short-term investment opportunities; loans and lease financing; investment manager and alternative investment manager operations outsourcing; performance, risk, and compliance analytics; and wealth management data management to support institutional investors. It also engages in portfolio management and risk analytics, as well as trading and post-trade clearing services with integrated compliance and managed data. The company offers its products and services to mutual funds, collective investment funds and other investment funds, corporate and public retirement plans, insurance companies, foundations, endowments, fund managers, insurance companies, foundations, and investment managers. State Street Corporation was founded in 1792 and is headquartered in Boston, Massachusetts.
I have categorized the company under the BDC sector in my sector classification, reflecting its focus on business development. Similar companies in my portfolio include Prospect Capital (PSEC) and Franklin Resources (BEN).
Background Information on the Analysis
As I aim to invest in companies with the ability and willingness to pay dividends, preferably those that grow year after year, I consider the dividend payout as a means to achieve financial independence without having to worry too much about the right or wrong time to sell stocks. My goal is to find companies with a stable history of dividend payments that also increase annually.
When analyzing the numbers, I use both my own calculations and external service providers such as Seeking Alpha. My own calculations involve extracting data from over 500 quarterly reports to form a view of the company’s fair value based on its current earnings. Note that this is not a buy or sell recommendation; the assessment is based on my own calculations, and I cross-verify the results with different sources when the goals are achieved.
As of this writing, State Street’s (STT) stock is priced at $70.19 per share. The company pays a dividend of $2.76 per share, resulting in a current dividend yield of 3.9%.
According to my calculations, STT has paid dividends for 36 consecutive years, providing a reliable indication that the company aims to return a portion of its earnings to shareholders. Considering one “hiccup” year with a flat dividend, after a company has paid increasing dividends for at least 10 consecutive years, the potential for STT is a 12-year streak.
Seeking Alpha states that STT has continuously paid dividends for 25 years and increased its dividend for the last 12 years. Therefore, from either perspective, the company demonstrates a systematic commitment to raising and regularly paying dividends.
The chart above illustrates the long-term trend of dividend increases. Each bar represents a quarter, and the latest increase is expected to continue for the next three quarters. The next increase is anticipated in September 2024. Although STT broke its streak between 2009 and 2010, it still paid a nominal $0.01 dividend during that period. In 2011, STT paid $0.72 in dividends when the stock price averaged around $40. The current confirmed dividend is $0.69 per quarter, almost matching the annual dividend a little over 10 years ago. Therefore, the company has nearly quadrupled its dividend over the past 12 years.
If one had purchased 1,000 shares of STT at the beginning of 2011 for around $46 per share, the investment would have cost $46,000. Dividends received over the years would have amounted to $690. In November 2023, with the stock price at $69 per share, the investment value would have risen to $69,000. Over the next four quarters, dividends would bring in $2,760, with an estimated total of around $15,000 over the years.
The total return from a company that systematically raises and regularly pays dividends can provide decent returns without having to sell off the principal. While retrospective investing is futile, this example illustrates the real power of such a strategy.
Seeking Alpha also indicates that State Street has averaged an 8.32% annual increase in dividends over the last 5 years, a pace significantly faster than the average inflation rate.
Earnings Generation and Dividend Safety
A company can only pay dividends for the long term based on its earnings capacity. While a company may pay dividends exceeding its earnings in the short term, it cannot sustain this practice in the long run. STT’s rolling 12-month earnings are $7.22, resulting in a dividend payout ratio of only 38%. This indicates that STT can continue to pay dividends and potentially increase them in the future based on its earnings.
Free cash flow is another aspect to consider when paying dividends. STT’s calculations show a rolling situation of $11.20 per share, making the dividend-to-free cash flow ratio favorable for future dividend payments.
Other Influencing Factors
Now that we have discussed dividends, let’s look at other factors supporting the STT acquisition.
Starting with the P/FCF ratio (price-to-free cash flow), STT’s ratio is 6.26, while the sector median is 6.9. This makes STT’s price 9.3% cheaper than its peers. The PE ratio is 9.72, compared to the sector’s long-term median of 12.79, indicating a 24% cost advantage.
Measured by the price-to-book (PB) ratio, STT’s PB ratio is 0.94, while the sector median is 2.25, more than twice STT’s. A PB ratio below 1 suggests that investors value a “dead” company more than a “living” one, according to Jukka Oksaharju.
The return on equity is over 10%, and I personally target companies whose return on equity is above 10%. Therefore, STT meets this criterion.
My view on the company’s value, when it would be wise to buy, is $86.08, with STT still having a 22% distance to reach this level.
When to Time the Trades
My trade may not come soon as I aim to time purchases during an upward trend. Below is an image where I use an indicator to time the purchase.
The blue arrow represents a potential entry point based on the indicator. However, my next entry would occur when the price falls below the green support line and closes below it. The next step would be to buy when the price starts rising again and crosses the red resistance line. The purchase would happen on the day following the crossing.
STT is not high on my list for near-future acquisitions, but this provides an idea of how I aim to buy and value companies.
For those interested in the source of the chart, it is from Tradingview, where it is possible to use several different indicators even with a free membership. I use a customized SuperTrend indicator for buy and sell signals. The blue line is a 200-day moving average, and the yellow line is a 100-day moving average, mainly indicating the overall trend but not influencing investment decisions directly.
In summary, when SuperTrend signals a buying point, it gives me a signal to make an investment in a company that otherwise meets the criteria for investment. I don’t create a sell order even if the indicator suggests selling, unless the target is at a selling price. The biggest help for me is that this allows me to select rising trend targets and, conversely, for selling targets that are in an uptrend, so I’m not selling them too early.
Please provide feedback if this kind of pre-consideration and analysis is useful or provides additional value. Until the next moments…