Can you beat the Dow Jones With This Cash-Gushing Dividend Stock

The Dow Jones Industrial Average, an indicator made up of 30 significant publicly traded U.S. firms, has outperformed the overall market this year but is still in the black. Only around 1.7% more is added in 2023.

I believe this cash-guzzling firm can outperform the Dow after it saw a significant sell-off, even if the index has a history of producing respectable returns when held steadily over an extended length of time.

A strong super-regional bank in the making

One of the biggest banks in the United States is Truist Financial (NYSE: TFC), which has over $555 billion in assets. After BB&T and SunTrust combined in 2020, the brand was created.

Truist saw a sharp sell-off following the financial crisis earlier this year, like many other super-regional banks, and is currently down roughly 30% in 2023. Right before the Federal Reserve abruptly raised interest rates, Truist made an investment in lower-yielding, longer-duration bonds. As a result, most bank bond portfolios are now underwater since interest rates and bond prices have an inverse relationship.

Truist’s portfolios of held-to-maturity (HTM) and available-for-sale (AFS) bonds showed unrealized losses of almost $20 billion at the end of the first quarter. In light of the bank’s estimated $25.9 billion in assets,

At the conclusion of the first quarter, Truist’s available-for-sale (AFS) and held-to-maturity (HTM) bond portfolios had unrealized losses of around $20 billion. That’s a sizable sum given that the bank has around $25.9 billion in tangible common equity, but bear in mind that the AFS unrealized losses have already been taken into account when calculating tangible common equity.

The worry here is that if Truist ever had to sell these bonds while they trade at a loss to recover the unrealized losses that will be recovered when the bonds expire and interest rates stabilise.

Assessing capital

Truist has a very solid deposit base in regions that are rapidly expanding and comprises of a sizable clientele of retail, commercial, and corporate clients, thus I highly doubt that it will experience comparable difficulties. For instance, consumers of retail and commercial banking account for 55% of Truist’s total deposits, with an average amount of $17,000.

Bill Rogers, the chief executive officer of Truist, stated at the end of May that the bank’s deposits were down less than 2% for the quarter, but he attributed that to seasonal factors and quantitative tightening, in which the Federal Reserve removes liquidity from the economy and dries up bank deposits. Any sort of bank run is quite improbable given the variety of Truist’s deposit base.

Investors are also concerned that regulators will soon require super-regional banks like Truist to include their unrealized AFS bond losses in their capital ratios. One such ratio is the Common Equity Tier 1 (CET1) capital ratio, which measures a bank’s core capital as a proportion of its risk-weighted assets, such as loans, and looks at the core capital as a percentage of that ratio. The CET1 ratio for Truist was 9.1% at the end of the first quarter.

However, if these unrealized AFS losses were taken into account, the CET1 ratio would substantially decrease to 6.2%, which is below the 7% regulatory threshold.If Truist was short on capital, the sustainability of its dividend may be in doubt. Banks employ extra capital over their CET1 requirement to pay dividends and execute share repurchases. However, the $1.95 billion in new capital that the bank will soon receive through the sale of a small share in its insurance subsidiary is not included in Truist’s existing capital ratios. Truist continues to anticipate that organic capital will be generated from earnings, and I have a suspicion that regulators will give banks some time to make the change.

A healthy dividend that is sustainable

After this year’s sell-off, Truist’s dividend yield shot up to an astounding 6.9%. Rogers stated during the conference that the dividend “is really important in terms of maintaining a strong dividend, a really good dividend yield, and good return for our stakeholders.” Therefore, I believe Truist has the necessary money and management motivation to keep the dividend.

Finally, I think that over a longer period of time, Truist’s stock price will increase to more typical levels as the regulatory environment becomes clearer, unrealized bond losses start to decline, and deposit rates stabilise.

Truist will also ultimately reap the rewards of its merger, whose integration took three years and a tonne of effort. All of this should make it possible for owners to outperform the Dow by holding Truist’s shares through a mix of dividend passive income and stock price growth.

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