Should You Invest in BK Stock as it Trades Near 52-Week High?
BK stock has soared 48% this year. It has widely outperformed its industry, the S&P 500 Index and close peers —Northern Trust NTRS and State Street STT.
Year-to-Date Price Performance
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Last week was an impressive one for the U.S. equity markets. The S&P 500 Index recorded its best week of the year and even briefly touched the 6,000 level. The rally was driven by Donald Trump's win in the U.S. presidential election and the Federal Reserve's 25 basis point cut in interest rates.
The developments spurred a massive rally in financial sector stocks and BK wasn't untouched. Trump's re-election raises hopes of a de-regulation in the sector that has been reeling under stringent regulatory requirements. Further, lower interest rates will support the sector's top-line growth, which is presently hampered by high funding costs.
Lower Interest Rates: A Key Factor Driving BNY Mellon Stock
The Fed lowered interest rates for the second time last week. Earlier in September, the central bank cut rates by 50 basis points for the first time since March 2020. Cooling inflation numbers and a slowdown in the labor market drove it to take this step.
BNY Mellon, together with STT and NTRS, has been facing funding cost pressure since last year. This has hurt their net interest income (NII) and squeezed margins.
BK's NII has seen a five-year (2018-2023) compound annual growth rate of 3.8%. In the first nine months of 2024, its funding costs stabilized, driving NII higher. Also, net interest margin recorded a slight improvement during the period.
With the Fed expected to keep cutting interest rates, BNY Mellon is expected to gain from it. Management now projects NII to be down 5% this year, a change from prior guidance of a 10% decline. This is based on the market-implied forward interest rates and assumptions of higher investment yields, deposit margin compression and modest deposit run-off.
Other Factors Supporting BNY Mellon's Performance
BNY Mellon's growth initiatives are impressive. The company has been launching several new services and products, digitizing operations and making strategic acquisitions.
Earlier this month, BK completed the acquisition of Berwyn, PA-based Archer Holdco, LLC, a leading technology-enabled service provider of managed account solutions to the asset and wealth management industry. This will enable the company to enhance its enterprise platform to support retail-managed accounts. Further, Archer will provide BNY Investments and BNY Pershing's Wove wealth platform for advisors with expanded distribution of model portfolios and access to its multi-custodial network.
Additionally, in September, BNY Mellon announced plans to launch Alts Bridge, an extensive data, software and services solution, by fall. It will cater to rising demand from wealth intermediaries seeking simplified access to alternative and private market investment products. The platform has been designed to integrate seamlessly into intermediaries' existing desktops, starting with BNY Pershing X's Wove advisory platform and NetX360+, incorporating cutting-edge artificial intelligence and analytics tools.
BNY Mellon has a solid balance sheet. As of Sept. 30, 2024, the company had a total debt of $52.7 billion, significantly lower than its cash and due from banks, and interest-bearing deposits of $108.5 billion. It maintains investment-grade long-term senior debt ratings of A1, A and AA- from Moody's, S&P Ratings and Fitch Ratings, respectively, which render it favorable access to the debt markets.
BNY Mellon is expected to keep enhancing shareholder value through efficient capital distributions. After clearing the 2024 stress test, the company hiked its quarterly cash dividend by 12% to 47 cents per share. In the last five years, the company increased its dividend four times. It has an annualized dividend growth rate of 8.92%, with a payout ratio of 34%.
Dividend Yield (TTM)
Story Continues
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Similar to BK, State Street hiked quarterly dividends by 10.7% as it cleared this year's stress test. On the other hand, NTRS has kept its dividend payouts steady at 75 cents per share since July 2022.
Further, in April 2024, BK announced a new share repurchase program worth $6 billion. As of Sept. 30, 2024, approximately $6.08 billion worth authorization remained available. The company expects to return 100% or more of its earnings to shareholders in 2024 after having returned 123% last year. Further Upside Left for BK Stock?
Despite the huge rally in BK shares, it appears inexpensive relative to the industry. The company's forward 12-month price/earnings (P/E) multiple of 11.95X is lower than the industry's 12.03X.
Price-to-Earnings F12M
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Image Source: Zacks Investment Research
Hence, from a valuation perspective, BNY Mellon's shares present an attractive buying opportunity. The stock is still undervalued as the market has yet to recognize or price the company's growth prospects fully.
Further, BK is expected to deliver solid results in 2024 and 2025.
Sales Estimates
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Earnings Estimates
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Image Source: Zacks Investment Research
BNY Mellon is also witnessing northbound estimate revisions for the current and the next year.
Estimate Revision Trend
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Image Source: Zacks Investment Research
BNY Mellon has demonstrated remarkable growth and resilience, significantly outperforming industry benchmarks and key peers. The company's efforts to expand its product suite to cater to client needs are expected to translate into substantial financial gains.
Also, cheap valuation, a healthy growth trajectory and positive estimate revisions make BK stock an attractive pick. BNY Mellon currently carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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The Bank of New York Mellon Corporation (BK) : Free Stock Analysis Report
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