Efficiency Ratio: Is Your Bank Profitable?

10 minutes

efficiency ratio

Banks are either hated or loved, depending on when you ask customers. If they’ve been approved for that loan or denied a refund of any fee, you will get different answers. As a value investor, banks and financial institutions can be a frustrating experience to try to value. They don’t fall into the same category that other companies do, so therefore they often get ignored. Today we will continue with our series of looking at the different formulas that can help us unravel the mysteries of these institutions. In this post, we will delve into the efficiency ratio and what it means, and how to calculate it.

“In the end, banking is a very good business unless you do dumb things.”

Warren Buffett

The cool thing about learning to value banks is that once you learn how to analyze one, you pretty much can analyze all of them. There are about 500 banks that trade on the major exchanges, so this should give you plenty of options to choose.

Now, don’t get me wrong they can be very complicated with all the financial instruments, heavy regulations, old account rules, macro factors, and the intentionally vague jargon to try to throw you off.

But at their core, all banks are similar in that they borrow money at one interest rate and then hopefully, lend it out at a higher interest rate, pocketing the spread between the two. Which is the main avenue that banks use to make money.

“You don’t make money on tangible common equity. You make money on the funds that people give you and the difference between the cost of those funds and what you lend them out on.”

Warren Buffett

Definition of Efficiency Ratio

The Efficiency Ratio is calculated by dividing the bank’s Noninterest Expenses by their Net Income.Banks strive for lower Efficiency Ratios since a lower Efficiency Ratio indicates that the bank is earning more than it is spending. … A general rule of thumb is that 50 percent is the maximum optimal Efficiency Ratio

Sageworks

Sounds and looks pretty simple, doesn’t it? And as ratios go it is pretty simple and straightforward.

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Breaking Down the Two-Stage Dividend Discount Model for Beginners

11 minutes

two-stage dividend discount model

Dividends are the best friend an investor has. They are the gift that keeps on giving and finding a company that pays them consistently over a long period of time is a great way to build your wealth. Finding the intrinsic value of a dividend paying company is paramount to investing with a margin of safety. This helps protect our investments and grow our wealth. Using the dividend discount model is a great way to find that intrinsic value, and the use of the two-stage dividend discount model is a fantastic way to get a more precise view of that value.

Our goal is to find the approximate value of a company, not to quibble about the minor details, we must remember that valuation is an art. What one investor sees as value, another might see as a liability, it can be seen as in the eye of the beholder.

The dividend discount two-stage model is a little more involved than the Gordon Growth model that we addressed last week, but it is definitely doable on our part. We will walk through all the steps to help you calculate it on your own and give you examples to help illustrate what we are doing.

What’s the big deal with dividends, and why do we keep talking about them?

To give you an example of the power of dividends, let’s take a look at our favorite guru, Warren Buffett. Over the years Buffett has grown his wealth by investing in and buying businesses with strong competitive advantage (moat) that have traded at fair or better prices.)

His favorite company to invest in is one that pays him a dividend. Did you know that:

  • Over 91% of his portfolio is invested in stocks that pay a dividend
  • His top 4 holdings, which make up over half of his holdings pay a dividend yield of 2.9%
  • Best of all, most of his stocks have paid a rising dividend for decades.

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Dividend Discount Model: A Simple Three Step Guide to Valuation

9 minutes

dividend discount model

In our quest to find the intrinsic value of stocks that we are interested in investing in, we have looked at several different types of formulas to help us determine that value. We haven’t considered the role that dividends play in these valuations, and as dividend investors, this is an important fact to factor in. Today we will discuss the dividend discount model to find the intrinsic value of dividend paying stocks.

Dividends are such an important variable to building our wealth, it is in our best interests to continue to add to our toolbox the different methods of calculating intrinsic value. The dividend discount model is simplicity itself and requires only three inputs to determine the value of a stock.

As we continue to strive to find the fair value of any stock that we wish to purchase, it is important to remember that the calculations that we do should never replace other methods of investigation, such as reading the 10-k, looking into other metrics, and doing our research.

In our efforts to narrow down our investing processes and learn more about different formulas to help us find intrinsic value, it is important to remember that we should try not to go down the rabbit hole in search of minutiae. A thought from Warren Buffett on intrinsic value.

“It’s better to be approximately right, than precisely wrong.”

That being said we should strive to be as accurate as we can, to help narrow down our errors in finding intrinsic value.

Dividend Discount Model Definition

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GameStop: Is this Game Still Worth Playing?

9 minutes

 

GameStop

Recently GameStop (GME) has taken a beating in the market with the release of some very unflattering news. As we all know the stock market is a very unforgiving place.

GameStop came across my radar a few years ago when I was doing my regular screening looking for new opportunities. Until recently I hadn’t pulled the trigger on the company, but after digging into it a little more it appeared to be a great opportunity. In the light of recent news, I am wondering if I made a good decision or walked into a value trap.

I admit I was first attracted to the 6% dividend yield, which was very enticing. In addition to the low P/E ratio, it appeared this was a great opportunity, as well as other financial strengths.

In this article, I will take a look at my findings again and re-evaluate my decision to buy and whether or not to stay in at this point or to sell and just cut my losses.

Retail is a brutal environment and the competition can be fierce. With the recent announcement of Microsoft’s (MSFT) Xbox’s subscription service there has been a lot of concern among GameStop investors in how this will affect the company long-term.

Let’s take a look.

Business Overview

Founded in 1994 in Grapevine, Texas. GameStop operates more than 7600 stores now. These stores are located in the U.S., Australia, Canada, and Europe.

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How to Find Wide Investment Moats the Easy Way

13 minutes

 

wide investment moat

Finding a company with a strong competitive advantage like an Apple (AAPL) is what every investor is looking for. It is not easy and there are not a lot of formulas that you can use to find them. We are all on the lookout for companies with wide investment moats. Especially value investors. We love these types of companies. Companies with wide investment moats are likely to be around for a long time, not that they are invincible. But they are great companies for growing wealth over time.

“But all the time, if you’ve got a wonderful castle, there are people out there who are going to try and attack it and take it away from you. And I want a castle that I can understand, but I want a castle with a moat around it.”

Warren Buffett from a talk he gave to MBA students at the University of Florida

What is the definition of an investment moat?

Charlie Munger and Warren Buffett are generally accepted as the originators of the term “moat”.

A moat refers to “business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.”

Investopedia

Competitive advantage is going to be any factor that allows a company to provide a good or service that is essentially the same as it’s competitors. But allowing them to beat their competitors in profits.

An example of this would be if you shop online for a product. Chances are you will see many different companies offering the same product but one stands out because they offer a lower price or perhaps free shipping.

This gives that company a competitive advantage over their competitors because of the free shipping, that the others may not be able or willing to offer.

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6 Proven Ways You Will Grow Rich from Dividend Investing

10 minutes

photo-by-simon-cunningham-follow-flickr-creative-commons_large
photo-by-simon-cunningham-follow-flickr-creative-commons_large

What is a dividend?

According to Investopedia “A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders.”

Dividends can be issued as cash, shares or other property.

So why are we interested in dividends? And how can they help us? Well according to Standard & Poor’s report dividends are responsible for 44% of the last 80 years of returns of the index. I don’t know about you but that caught my eye. Almost half of the returns people earned was due to dividends! I thought this might bear some looking into.

How do stock dividends work?

Dividends are a payout that a company will give back to people that own a part or share of their company. It can be in a form of cash, more stock or other property.

Dividends are usually paid out every three months and are declared before they are paid out. When a dividend is declared they also include the size of the dividend, the ex-dividend date and payment date.

To break these down a little bit. The size of the dividend will be declared which means that for example last quarter Wells Fargo announced they would be issuing a $.37 dividend for the quarter. So each quarter they announce the amount of money they are going to pay out.

The ex-dividend is typically two days prior to the record date, which is the date that you must own the stock. Investors need to buy the stock three days prior to the record date because it usually takes three days to settle any trade on the stock market. Since the ex-dividend date is two days before the record date the investor must hold the stock one day before the ex-dividend to received the payout.

The payment date is pretty obvious. This is the day that we get the money, stock, etc. It will be deposited into your brokerage account on that date. This is our favorite day!

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