Banking stocks have had a difficult year due to inflation, heightened interest rates, and fears that student loan repayment could be paused or forgiven. The worst-case scenario played out earlier in the year for Silicon Valley Bank (SVB) when the California-based entity failed in a highly publicized fashion.
The combined effects of all these factors have weighed down the industry as a whole, and Cullen/Frost Bankers, Inc. (NYSE: CFR) in particular. The bank holding company’s stock dropped 23% in the month of March alone, the same month that SVB failed.
CFR has only slightly recovered since then, but it’s still down over 21% year-to-date. The stock currently trades at around $100 per share after breaching $130 per share earlier in the year. Aside from the industry turmoil, the bank has also had to fight against higher expenses and falling deposits.
There were some signs of life, however, after the third quarter of 2023 earnings report was released. Cullen/Frost handily beat expectations for revenue and earnings, but that wasn’t all. The bank announced that it would start paying out a dividend in the 4th quarter. In response, CFR jumped 10%.
So is Cullen/Frost Bankers stock a buy?
What Made Cullen/Frost Bankers Stock Drop?
While there’s no doubt that the stock has been affected by macroeconomic headwinds, there have still been concerns about the company’s ability to grow revenue.
Those fears have been quelled for the moment, as Cullen/Frost logged over $513 million in the 3rd quarter of 2023. That was not only a 7.1% year-over-year gain, but it beat analysts’ estimates by over 5% as well.
Net income of $154 million represented a ballpark 8% decrease from last year, but it was still above the analysts’ consensus. Diluted earnings-per-share (EPS) came in at $2.38, less than $2.59 last year, but it smashed expectations by nearly 11%.
Rising interest rates actually worked in Cullen/Frost’s favor, as net interest income (NII) of $407 million was a 7.4% improvement over the same quarter of last year. The company also increased its average loans by $1.1 billion, a 6.8% year-over-year gain, to $18 billion in the quarter.
But hands down the most exciting news out of the quarter was the announcement that Cullen/Frost will begin paying a dividend in the 4th quarter of 2023. Shareholders of record on November 30 will receive $0.92 per share, shaking out to a 3.59% annual dividend yield.
That puts the company in line with Bank of America and Goldman Sachs, which both pay yields just above 3%. Dividends aren’t universally appealing among banking stocks, and that’s surely one of the reasons Cullen/Frost’s leadership chose to implement an attractive one.
Will Cullen/Frost Bankers Stock Keep Going Up?
The announcement of the upcoming dividend is certain to entice investors, but it can also raise some concerns. Chief among them is the company’s ability to sustain it, especially given Cullen/Frost’s net income decreased from the same quarter of last year.
There is also the concern that average deposits dropped over 10% in the 3rd quarter, down $5 billion to $40.8 billion. The bank also saw its costs rise, with non-interest expenses soaring by $35.4 million, a 13.7% increase, to $293 million.
The combination of decreasing profits, lower deposits, and rising expenses is certain to raise investors’ eyebrows, and for good reason.
On a more positive note, Cullen/Frost finalized the naming rights agreement for the arena where the National Basketball Association’s San Antonio Spurs play ball. The Texas-based bank has had a long-running affiliation with the team, as Cullen/Frost played a huge role in bringing the team from Dallas to San Antonio.
The Spurs are now playing in Frost Bank Center, after a deal that will cost the bank around $9 million per year. The company hopes the deal will lead to increased exposure for Frost Bank, but it remains to be seen if the benefits will outweigh the costs.
Is Cullen/Frost Bankers Stock Undervalued?
Cullen Frost stock is undervalued by 5.3% according to the consensus rating from 18 analysts who have a $108 price target.
There are 6 buy ratings and the most bullish forecast sees CFR jumping over 31% to $135 over the next year. On the other hand, there’s a single Sell rating. That most bearish forecast predicts Cullen/Frost shares will drop 8.4% to $94 over the next 52 weeks. 11 analysts rate the stock as a Hold.
Whether it’s the overall malaise in the banking industry or perceived weakness in Cullen/Frost itself, it’s clear that the analysts aren’t quite sold on CFR yet. A factor could be the company’s price-to-earnings ratio, which is currently at 9.81x. That’s above the industry standard of around 5x, and a sign that CFR could be eclipsing fair value.
Another red flag is the company’s return on average assets, which declined from 1.27% to 1.25% year-over-year. While it’s true that CFR was trading above $130 earlier in the year, there don’t appear to be any major catalysts to send the stock back in that direction.
Cullen/Frost Bankers Stock a Buy or Sell?
CFR stock dropped in large part due to external factors, but Cullen/Frost appears to be in no imminent danger of following in SVB’s footsteps. It beat expectations for the quarter, and it’s in a position to reward investors with a dividend.
But the dividend and the naming rights deal could be viewed as a negative for investors who hope that Cullen/Frost doesn’t overextend itself. The attempt to drive exposure and draw investors could backfire, and it remains to be seen whether those plays will play out in the long run.
There are also concerns about decreasing deposits and increasing expenses. If interest rates drop, that too could affect the bank’s bottom line. Investors looking to buy banking stocks at a bargain could do worse than CFR, but there are still plenty of challenges for Cullen/Frost ahead.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.