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Is Regions Financial stock undervalued?

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Higher shareholder returns

As an investor, the total return to shareholders is the single most important metric that you need to know. Regions Financial’s (RF) cumulative total returns matched the S&P 500 and S&P Banks Index over the five-year period.

The above graph compares the yearly percentage change in the cumulative total return of Regions Financial stock against the S&P 500 Index and the S&P Banks Index for the past five years. It assumes that the value of the investment in Regions Financial’s common stock and in each index was $100. It assumes that all of the dividends were reinvested.

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Regions Financial is trading at a low price-to-book ratio

Regions Financial’s price-to-book ratio has been below one since 2008. It crossed one in 2014. However, it slid below one again. The ratio is much lower than its level before the crisis. The price-to-book ratio is most widely used to value banks. You can read more about it in Must-know: Understanding the price-to-book value ratio.

 

Regions Financial’s stock price also hasn’t recovered since it fell during the crisis. The above graph shows Regions Financial’s historical price-to-book ratio.

Valuation lower than its peers

Regions Financial’s has the lowest price-to-book ratio of ~0.8 in its peer group. Its ratio is also lower than the SPDR S&P Regional Banking ETF (KRE) and the SPDR S&P Bank ETF (KBE). They have a price-to-book ratio of ~1.3. U.S. Bancorp (USB), Wells Fargo (WFC), and First Horizon National (FHN) have price-to-book ratio greater than 1.5.

 

The above graph compares Regions Financial’s price-to-book ratio with other banks. Considering Regions Financial’s lower ROE (return on equity), its valuation looks appropriate.

Factors that will impact the bank’s stock price in future are its ability to return value to the shareholders and generate earnings growth.

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