New Trade for April 27th, 2022

Due to a variety of factors including an unanticipated boost from the commodity-price effects stemming from the war in Ukraine, inflation has not proved to be as transitory as policymakers and markets had expected or hoped.  The progressing inflation environment is reflected in a broad increase in rates as the year-over-year increase in consumer prices has reached a 40-year high. Short and long-term interest rates have moved sharply higher in 2022, with 10-year Treasury yields rising 1.4% and two-year yields rising 1.9% year-to-date.

Amid surging consumer prices and increasing rates, many investors are looking for stocks that offer reliable income to hedge against inflation that continues to weigh heavily on markets.  Today we’ll discuss a lending company that provides investors with a substantial payout.  What’s more, this name has been noted as “one of the biggest potential beneficiaries” of rising rates, given management’s commitment to reinvest substantially into securities quarterly in 2022. 

Shares of regional bank M&T Bank (MTB) surged more than 8% last week after the company topped earnings expectations and provided solid guidance. For the quarter, the lending company reported diluted earnings per share of $2.62 on around $1.45 billion in revenue.  

“The first-quarter results continue to reflect M&T’s strong credit underwriting as evidenced by historically low charge-offs for the quarter and a stable allowance for credit losses,” CFO Darren King said. “Revenues were in line with expectations and expenses, which include the usual seasonal increase in salaries and employee benefits expense, were prudently managed.”

King also said on the call that the bank expects solid loan growth for the remainder of the year and that management anticipates that net interest income (the profit a bank makes on loans, securities, and cash after funding those assets) will rise substantially as the Fed boosts benchmark interest rates.

During the quarter, M&T also received approval from the Federal Reserve to finalize its $8.2 billion purchase of People’s United Financial, a significant deal that propelled the bank to well over $200 billion in assets.  With the acquisition now closed, M&T will soon resume share repurchases — the board of directors recently reauthorized an $800 million stock buyback program. 

 Morgan Stanley analyst Betsy Graseck recently double upgraded M&T Bank to Overweight from Underweight with a price target of $238, up from $179, arguing that rate sensitivity “trumps” credit fears.  Baking in three additional rate hikes adds a total of $623M to 2022 net interest income and $3.01 to EPS, said Graseck, who sees M&T being “one of the biggest beneficiaries” of rate hikes given its “large cash pile” and management’s clarification that it intends to reinvest $2B of cash into securities quarterly in 2022. 

Anyone looking to cut back on risk in the second half of the year will appreciate MTB for its below market beta of 0.8 and a debt/capital ratio of just 18%.  The cherry on top for M&T investors is the  2.84% annual yield, backed by a highly sustainable 32% payout ratio.