Market Mad House

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Long Ideas

The Value in Finance Bank of New York Mellon

The Bank of New York Mellon (NYSE: BK) might be the best value in financial stocks.

The Bank of New York reported a $3.652 billion net income on revenues of $15.35 billion on March 31, 2017. That gave the venerable financial institution a profit margin of 23.99% and a diluted earnings per share (EPS) number of 3.25 on the same day.

To add icing to the value investment cake, Bank of New York Mellon; or BNY Mellon, has an incredible amount of cash. It reported $85.01 billion in cash and short-term investments; $28.38 billion cash from investing and $3.219 billion in cash from operations on March 31, 2017.

The bank also reported $337.54 billion in assets on the same day even though it had a market capitalization of $48.59 billion on May 22, 2017. This indicates a financial institution that might be incredibly undervalued.

Why Bank of New York Mellon might be Incredibly Undervalued

The current enterprise value estimate for Bank of New York Mellon of -$2.623 billion might be way off for a simple reason. One of the Bank of New York’s major businesses might be about to boom.

People exit the Bank of New York Mellon Corp. building in New York, U.S., on Wednesday, May 6, 2009. Bank of New York Mellon Corp. is one of the 19 U.S. banks being put through a stress test by regulators, the results of which are expected to be released tomorrow. Photographer: Jonathan Fickies/Bloomberg News

Most Americans have never heard of the Bank of New York Mellon, because one of its specialties is transferring large amounts of cash around the world. Currently there’s a lot cash out there to be transferred.

U.S. companies were holding around $2.6 trillion in overseas accounts CNBC writer Nick Wells estimated on February 28, 2017. The funds are kept out of the country to avoid America’s corporate income tax rate which is 35% – the highest in the world.

Interestingly enough a lot of Americans; including President Donald J. Trump, and his economic advisors want to bring that money home. Partially as a low cost economic stimulus but also to generate more tax for Uncle Sam.

Would Trump’s Tax Holiday Help Bank of New York Mellon?

Trump has proposed a tax holiday to let companies bring the money back, something that might be politically impossible to sell to Congress. Although a Republican Congress did give President George W. Bush a tax holiday in 2004 when two thirds of the earnings were repatriated, Wells noted.

If such a holiday were to occur; and it is a big if, a lot of the money would come through BNY Mellon. CNBC estimated that companies would bring $1.7 trillion back to the U.S. That might generate fees for Bank of New York which moves funds for big companies.

Such a holiday might be unlikely now because few Congressmen or Senators would want to be seen giving big corporations a huge tax break in today’s political climate. Hostility to Wall Street and big business is running high and destroying the careers of politicians seen as puppets of moneyed interest such as Hillary Clinton.

Is Bank of New York Mellon Really a Good Investment?

Despite the unlikelihood of a tax holiday, Bank of New York Mellon is still a pretty good investment that rewarded investors with a return on equity of 10.19% on March 31, 2017.

Those investors also took home a dividend of 19¢ on April 28, 2017, which was up 2¢ from April 2016 when the payout was 17¢. Despite all of its troubles, BK has been paying a steady dividend every quarter since 2013 according to ycharts.

Even with that there are some huge risks at Bank of New York Mellon, in addition to the negative enterprise value there were liabilities of $298.4 billion on March 31, 2017. There’s also serious exposure to shaky overseas markets including those in Europe and China.

The Problem with Oil

Another potential threat to Bank of New York is falling commodity prices, particularly oil prices. Historically the Bank of New York has held accounts for oil-producing nations like Venezuela and handled transfers for companies like Exxon Mobil (NYSE: XOM).

That cash cow is threatened by oil prices that are hovering around $50 a barrel. Oil made “news” on May 22, 2017, by jumping to a new high of $51.06 a barrel.

If the oil glut and price drops continue, Bank of New York might lose business. Particularly if the economies in countries like Venezuela, Russia and Saudi Arabia collapse because of low oil prices. Venezuela’s economy is already near collapse because of mismanagement.

Even with these problems I still think that Bank of New York is a good investment because its price is low when compared with competitors like Goldman Sachs (NYSE: GS). Goldman Sachs was trading at $223.48 a share while BK was trading at $47.47 a share on May 25, 2017.

If you are looking a slightly different kind of value investment in banking, check out Bank of New York Mellon. It is not for the faint of heart, but this bank is making a lot of money and paying out for investors.