Market Commentary: Is This The Safest Bank In America?
In 2022, Forbes released a “Best Banks In America” list and placed one little-known bank at the top of the list. Impressively, it was the third time five years that the bank had topped the prestigious list. Yet few investors are aware of this under-the-radar bank: Home Bancshares.
At time when interest rates are rising and banks are dropping like flies, is this the safest bet in the sector?
- Home Bancshares was ranked #1 on Forbes’ “Best Banks in America” list in 2018, 2019 & 2022.
- The company has a strong financial foundation with high levels of profitability, growth, and credit quality.
- It also pays out a generous dividend to patient investors willing to bet on the company’s solid fundamentals.
#1 Bank in America
Forbes has been criticized fairly in recent months for featuring many entrepreneurs who subsequently were found to have dubious rises to success. From Elizabeth Holmes to Sam Bankman-Fried, the list of high profile entrepreneurs featured by Forbes as “the next big thing” whose reputations subsequently tumbled has been extensive.
Many of those profiles, however, rely heavily on opinion; it’s difficult to get access to the inner workings of private companies after all. The company’s list of top banks, by contrast, is selected based on highly quantitative measures, including common equity, tier 1 ratio, efficiency ratio, net-interest margin, return on assets, and risk-based capital ratio.
Forbes examines a broad list of criteria, including profitability, growth and credit quality. And among the list of 100 largest publicly-traded banks, Home Bancshares came out on top in 3 of the last 5 years, a remarkable achievement.
Home Bancshares 2013 – 2023
Another remarkable aspect of Home Bancshares is that in 2013 the share price sat at $19 per share and a decade later, again, the share price sat at $19. What makes that statistic so surprising is the growth that has occurred in the interim.
In 2013, the company reported revenue of $237 million. In 2022, top line revenues came in at $870 million. Back in 2013, cash on the balance sheet sat at $169 million. In 2022, the figure had risen to $724 million. For the last 10 years straight, we have seen positive levered free cash flow too.
It seems fair to say that just about every financial measure has shown vast improvement over the past 10 years, and yet the share price has effectively made no progress.
Of course, it’s not entirely a fair statement. In 2020 the share price plunged during the lockdown period while in 2021 it soared by almost 200% from its lows. Currently, it’s down about 30% from those highs.
For the patient investor, this kind of share price volatility offers opportunities galore. The fundamentals show steady improvement year after year yet the share price is turbulent, meaning when the market is sell-off mode, it’s often a reflection of sentiment more so than fundamental weakness.
That argument appears to be supported by a valuation analysis. When we ran the numbers on Home Bancshares, we arrived at fair value of $29 per share, a full 46% higher than where the share price currently sits. Admittedly, analysts aren’t quite so bullish. Among the sample of 6 analysts, the consensus estimate is $25.50 per share with a range from $25 to $27.
Either way, shares of Home Bancshares appear to offer substantial upside opportunity and for patient investors it is paying out a generous 3.61% dividend in the interim. The dividend has been paid out for 9 years straight and the payout ratio is 40%, suggesting there is little risk to it near-term.