An Interesting Speculative Play in Finance at BNY Mellon

The most intriguing speculative play in financial stocks these days might be Bank of New York Mellon (NYSE: BK). Bank of New York is a fascinating finance play because of one its core businesses; moving or repatriating money around the world.

Repatriations are a potential cash cow for Mellon because U.S. corporations have an an estimated $2.6 trillion in cash and investments parked offshore, CBS reported. That money is over there because of the ridiculously-high U.S. corporate income tax rate of 35%.

The proposed Republican tax plan calls for the corporate income tax rate to be lowered to 20%. The hope is that will bring the money home, something nobody can guarantee will happen. Nor does anybody know how much companies will actually shift to the United States.

The GOP Tax Plan might be Lucrative for Bank of New York Mellon

If it works, that would be good for Bank of New York Mellon (BNY Mellon); which specializes in such repatriations. Although the potential payoff is huge, in June Bloomberg estimated that one company; Apple (NASDAQ: AAPL) had $256.8 billion parked outside the USA.

A woman walks past a logo at the office of the Bank of New York Mellon in Brussels, February 25, 2010. REUTERS/Sebastien Pirlet

Other huge stashes of cash overseas include those of; Alphabet (NASDAQ: GOOG); $92.4 billion, Microsoft (NASDAQ: MSFT); $126 billion, General Electric; $83.5 billion, Cisco Systems; $68 billion, and Oracle (NYSE: ORAC): $59.4 billion. The potential flow of cash here is vast, and these companies are the tip of the iceberg.

The chances of the GOP tax plan actually passing and reaching the president’s desk are small. The effort faces a unified Democratic opposition, and the Republican Party is badly fragmented.

The fragmentation is made by worse by President Donald J. Trump (R-New York); who is waging a personal war against some Republicans, including U.S. Senators John McCain (R-Arizona) and Bob Corker (R-Tennessee). CNN estimated that Trump has attacked one out of five GOP Senators which will make hard for the party to get any legislation through the Senate.

Even if GOP efforts fail, a cut in the corporate tax rate is likely in the near future’ because of all the potential tax money, it would bring back to the United States. If Republicans fail to achieve it, Democrats are likely to try if they recapture Congress in 2018. The GOP will also undoubtedly try again cutting the corporate tax rate again if it retains its Congressional majority.

Note: I would give the odds of Democrats winning next year’s Congressional elections at 50% right now. Those odds are likely to shift in Democrats’ favor if the war between Trump and other Republicans continues.

Bank of New York Mellon is a Cryptocurrency Play – who knew?

Beyond the potential repatriations windfall, there is something else really fascinating about Bank of New York Mellon (BNY) – it is a potential cryptocurrency play. Mellon has been actively researching and experimenting with blockchain and altcoins; while finance industry leaders have been badmouthing them.

BNY Mellon is listed as one of the participants in the Ethereum Enterprise Alliance (EEA). The alliance is an effort to create commercial applications for Ethereum; which is really an open sourced operating system and data transmission network built in the blockchain. The popular cryptocurrency of the same name is really one of the apps that operate in Ethereum.

To add icing to the cake, BNY Mellon is also participating in the Linux Foundation’s Hyperledger Project. Hyperledger is an effort to build a global blockchain-operating system for marketplaces, micro-currencies, data-sharing networks, and decentralized communities in Ethereum. One of Hyperledger’s goals is to vastly reduce the cost and complexity of transmitting money around the world, which might increase BNY’s profits.

Bank of New York Mellon is also involved in an effort create a cryptocurrency for banks called Utility Settlement Coin (USC). USC is an altcoin designed to facilitate money transfers between banks developed by a company called Clearmatics. Other participants in the USC project include Banco Santander (NYSE: SAN), Deutsche Bank (NYSE: DB), Barclays, State Street Corporation (NYSE: STT), and Credit Suisse.

Is BNY Mellon a Value Investment?

All this will have many people wondering if BNY Mellon is a value investment. After all; a classic value-investing strategy is to invest in companies that supply services or infrastructure to other organizations.

Bank of New York Mellon already supplies some of the infrastructures for a growing global financial system. It is also investing in next-generation money-transfer infrastructure through its cryptocurrency efforts.

More importantly, BNY Mellon’s business is growing. During the last year, its revenues grew from $15.17 billion to $15.61 billion. Those revenues have the potential to go higher, they hit $15.98 billion in June 2015.

Is BNY Mellon Making Money?

The most impressive part of BNY Mellon from a value investors’ perspective is that it is a speculative play that is making money right now.

BNY Mellon’s net income reached a new high $3.785 billion on September 30, 2017. That was up from $3.37 billion in September 2016, and $2.698 billion in September 2015. That indicates the bank’s core business is lucrative and growing.

Although cash from operations has fallen at BNY, it was $2.929 billion in June 2017, down slightly from $2.955 billion the year before. A more impressive figure is cash from investing which was $12.08 billion on June 30, 2017. That was down from $23.96 billion in June 2016 but still commendable.

An even better figure at BNY Mellon is cash from financing which was -$16.27 billion on June 30, 2017. That negative is actually good because it indicates that BNY is not borrowing money to finance its’ operations, unlike most banks. Instead, it is generating cash from investments, which is great.

There is a lot of Value at BNY Mellon

There was also a lot of value at BNY Mellon in the form of $354.40 billion in assets and $96.62 billion in cash and short-term investments on 30 September 2017. The company also reported an impressive 25.35% profit margin on the same day.

Investors were rewarded with a 10.45% return on equity on September 30, 2017. Shareholders enjoyed a 24¢ dividend on 30 October 2017. That dividend was up 5¢ from April 28 when it was 19¢.

There are a few really bad things at BNY Mellon including a negative free cash flow of -$1.058 billion reported on June 30, 2017. Interestingly, BNY has reported a far higher free cash flow in the recent past; it was $4.359 billion on 31 December 2016.

Even scarier is the -$5.849 billion negative enterprise value reported on 7 November 2017. Although that enterprise value is getting better it was -$23.93 billion in November 2016, and -$37.56 billion in November 2015. If that pattern continues, BNY Mellon might report a positive enterprise value next year.

Why BNY Mellon might be a Value Investment

Such ugly figures can be good because they keep BNY Mellon’s share value low it was $51.03 on 7 November 2017. They might make it a classic Buffett-value play; a basically good company with a few problems and negatives. The low market cap of $52.26 billion reported on 7 November will add to the attraction.

There are a few other good things about BNY Mellon; including its lack of exposure to the U.S. mortgage market – which scares me to death. More importantly, BNY’s worldwide business adds a level of diversification that can protect investors from economic problems in the U.S.

Those looking for an interesting, but risky finance play in finance should check out BNY Mellon.