Stock in Capitol Federal Financial (CFFN) has fallen to a 20-year low following the failure of Silicon Valley Bank.
CapFed stock already was near a historic low before the banking crisis hit March 9, but plunged another 20% to $6.50 per share.
Capitol Federal stock came out at $10 per share in its initial public offering in 1999. The stock ran up in the early days after the IPO hitting a high of around $45-$50 per share. The bank did a stock split offering 2.2637 shares for every single share in Dec. 22, 2010. The split adjusted low for the stock occurred around Feb. 25, 2000, when the stock was around $4 per share.
The stock traded around $11 to $15 per share for many years, but has fallen 50% from there.
The banking crisis, led by Silicon Valley Bank, has hurt nearly all stocks in the banking sector. Banks' long-term bonds have lost value due to the Federal Reserve Bank raising interest rates over 400 basis points in a year. Capitol Federal Financial has $132 million in unrealized losses in its $1.7 billion bond portfolio. The losses don't necessarily have to be realized if the bank holds the bonds to maturity.
But there are other reasons why Capitol Federal Financial stock is suffering.
CapFed earnings have been trending down in recent quarters, with $0.12 per share in first quarter 2023, a penny short of estimates.
Capitol Federal has limited itself in growth; the bank has resisted growing over a $10 billion bank. When a bank is larger than $10 billion in assets, the institution faces additional supervision and regulatory costs.
After the IPO in 1999, CapFed bank was flush with cash, with capital representing 17% of total assets. The bank distributed that excess cash through dividends and special dividends over the years. Some of that cash also was used for buybacks of stock. The bank has paid out more in dividends than it earns every year over the last decade. Last year, for example, CapFed paid out $0.82 in regular and special dividends but only made $0.58 in earnings per share.
The bank's capital has fallen to $1.05 billion or 10.6% of the total assets.
Capitol Federal is fond of using a leverage strategy to borrow money from Federal Home Loan Bank of Topeka and reinvesting the money at the Federal Reserve Bank of Kansas City. Capitol Federal had borrowed up to $2.6 billion from Federal Home Loan Bank of Topeka and put the money with the Federal Reserve Bank of Kansas City. The company made $763,000 on this arbitrage deal in the most recent quarter. However, because this leverage strategy has fallen in profitability, the company has paid down a portion of the debt owed to Federal Home Loan Bank of Topeka.
The largest owner of Capitol Federal stock is Black Rock with 20.3 million shares or 14.8% of the company. T Rowe Price recently sold 12.8 million shares, but still owned 248,069 shares in February. Meanwhile, Dimensional Fund Advisors, led by David Booth, a KU graduate, has acquired 7.8 million shares or about 5.2% of outstanding shares of Capitol Federal stock.
About 86% of Capitol Federal’s loans are residential home loans. This is a good investment. The Kansas economy is doing fairly well. Unemployment is low, and jobs are plentiful. During the mortgage crisis of 2008 and 2009, many banks suffered losses, but Capitol Federal's loan portfolio survived that crisis pretty well because of the high credit quality of its loan base.
The book value of Capitol Federal stock is around $7.75 per share, so the stock is actually trading below book value at current prices. This is not uncommon in the banking sector, especially during a financial crisis. However, most bank stocks typically trade above book value, which is assets minus liabilities.
Capitol Federal stock has historically been viewed as a good dividend paying stock. However, when the stock price falls below the amount paid in dividends, the shareholder ends up losing value. With falling earnings, it makes me wonder about the future of special dividends. The board of directors shouldn't deplete capital in order to pay dividends.
Last year's total dividend payout of 82 cents per share would equate to a 12.35% yield at the current price. The yield for the regular dividend is 5.12%.
Capitol Federal will weather this latest banking crisis, but the size of the company probably will not grow over $10 billion. As a result, I don't see much upside in the stock. However, if the stock gets super cheap, say around $4.00 per share, you may see deep value investors invest in the stock.
Author Michael Hooper does not own any shares in Capitol Federal Financial (CFFN).
David Tangeman, an accountant, contributed to this article.
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