The sub-prime news (or noise) has gotten front-page coverage galore. Even the French are discussing it over their cafe. Now you know its serious!! But is it? We were in near-panic mode in late 1999 because the dreaded and feared Y2K was coming, and all major systems run by software were going to collapse. Did not happen, not even remotely. A lot of companies spent millions and billions to fortify their computer run systems and we survived.
Now, the new scary expression is sub-prime. Let's understand one thing: the vast majority of Americans pay their rent or mortgage payments on time. There is some exposure, for sure, to sub-prime loans, but is there a catastrophe looming in the weeds? I think not. But, hey it makes for great press and the talking heads can all understand the simplicity of sub-prime.
This all leads me to Washington Mutual, Inc. (NYSE:WM). The stock has become a bit of a poster child for sub-prime loans. Wamu is based in Seattle, Washington and has over 2,225 retail banking centers and over 470 lending "stores." Wamu's sub-prime profile is not way out of the ordinary; about 9% of the bank's loans are sub-prime caliber.
Standard & Poor's Research Division lowered its rating on WM because of this risk, and the fact that 28% of WM's loans are adjustable rate mortgages and they have yet to "be stress tested." Not a very insightful research piece. This analyst is almost assuming, pointing out that all sub-prime loans are valued at zero and written off by WM. There will be some write-off, but the stock has been hit way too hard and is oversold.
WM estimates are for earnings per share this year at $3.90, and next year at $4.35. The current dividend is $2.16 for a robust 5.4% yield. If, and I say if, Wamu has to take a $.30-.50 per share earnings hit to absorb sub-prime and clean it up, no serious analyst thinks the dividend is at risk. This is all worst-case scenario stuff. If WM takes a smaller hit to earnings or even no hit to earnings, the stock at this level is ridiculously cheap!!
Georges Yared is the author of "Stop Losing Money Today" and "Baby Boomer Investing"
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Reader Comments (Page 1 of 1)
3-19-2007 @ 7:34PM
sandy said...
Of course I LIKE your reasoning, especially since I am very long with a 13.65 average. But I do think things might be overblown and with no wispers of a dividend cut....this is a good entry point with lots of protection.
3-19-2007 @ 7:55PM
R. Noonan said...
I completely agree. The dividend payout is in the nieghborhood of 50% of earnings, so there is zero risk of a reduction. Given the preferential tax treatment of dividends, getting 5%+ return is a windfall. Even if things get uglier and the stock languishes, a long-term investor merely has to wait it out and collect the fat yield until payday. This is how the rich get richer: 5 and 10 percent at a time.