Undervalued Dividend Growth Stock Of The Week: HBAN

Huntington Bancshares Incorporated (HBAN) is a regional bank holding company that offers a range of traditional banking services, such as deposits, auto financing, mortgages, and insurance products.

Founded in 1866, Huntington is now a $12 billion (by market cap) major Midwest player that employs almost 16,000 people. Huntington operates over 800 branches which are located in the American Midwest region. Their core market is Ohio. They rank third in deposit share in Ohio, holding 15% of the state’s deposits.

2020 has been a tough year for bank stocks. A combination of a pandemic and low interest rates have challenged banks like never before.

But I think this year has been a blessing in disguise.

The Federal Reserve has stress tested US banks this year using stricter requirements than ever. In an unprecedented move, the Fed has actually tested banks twice this year. And the banks have been largely passing with flying colors – with buybacks back on again.

Furthermore, and more to the point, the pandemic has been in and of itself the biggest stress test you could possibly imagine.

Real life has trumped even the toughest regulators.

Again, US banks have held up remarkably well. If there were any doubts before about the strength of US banks, there shouldn’t be now.

2020 has also been a year of acceleration. Trends that were already playing out before are speeding up.

One of those trends is consolidation within banking, especially among smaller regional banks.

With low interest rates making it more challenging to make money in traditional banking, scale has become more important than ever.

Recognizing this challenge and taking advantage of the environment, Huntington recently announced a merger with fellow Midwestern bank TCF Financial Corp. (TCF). The transaction is expected to close in Q2 2021.

This move will see the two organizations combine and become a top-10 regional bank with approximately $135 billion in deposits. This is instant scale, giving the bank even more headroom to move out nationally, increase its market position, and improve digital capabilities.

Due to an overlapping footprint in the Midwestern region, Huntington (which serves as the acquirer and will retain its name post-merger) sees room for significant synergies – we’re talking 37% of TCF’s noninterest expense.

While it’ll take time to flesh out, this move could end up being a tremendous win for the combined enterprise. Huntington expects the transaction to be 18% accretive to 2022 EPS.

That kind of accretive growth would give them even more firepower for dividend raises, which obviously bodes well for shareholders.

Dividend Growth, Growth Rate, Payout Ratio and Yield

Huntington has already increased its dividend for nine consecutive years. The five-year dividend growth rate is an astounding 23.3%.

While dividend raises are currently on pause due to the coronavirus situation, I fully expect Huntington to get back to raising the dividend once more in 2021.

And with the new-and-improved Huntington emerging next summer, precisely as we’re moving past the virus, this could be a one-two punch to get the dividend moving aggressively again.

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