Expanding Loan Portfolio And Decisive Dividend Growth Signal Bright Future Amid Analytical Optimism

Key Takeaways

• Strengthening capital position and shareholder value through increased dividends and a stock repurchase program may boost investor confidence and share price.
  
• Expansion in loan portfolio across several segments, including auto and mortgage loans, indicates potential for higher net interest income and sustainable revenue growth.
  
• Rising expenses and lower-than-expected loan growth, alongside reliance on Puerto Rico government deposits, could negatively affect profitability and net interest margins.

Catalysts

Through its subsidiaries, provides various retail, mortgage, and commercial banking products and services in Puerto Rico, the United States, and the British Virgin Islands.

• The announcement of a 13% increase in the quarterly common stock dividend and a $500 million common stock repurchase authorization signify strong capital position and shareholder value enhancement, potentially boosting investor confidence and share price. Impact on Earnings Per Share (EPS)
  
• Loan growth across almost all lending segments, including strong performances in auto loans and lease balances as well as mortgage loan balances, indicates an expanding loan portfolio that could drive higher net interest income. Impact on Revenue
  
• An increase in net interest margin driven by higher average loan balances and the repricing of loans and investments in a higher interest rate environment, coupled with solid consumer spending and demand for new cars, suggests sustainable revenue growth from interest income. Impact on Net Interest Income
  
• Improvement in credit quality metrics, such as lower net charge-offs and non-performing loans (NPLs), indicates lower future credit losses and potentially increased profitability. Impact on Net Margins
  
• The significant amount of yet-to-be-disbursed federal funds and accelerated pace of disbursement are expected to support economic activity for several years, potentially further fueling loan growth and deposit balances, hence enhancing net interest income and overall growth prospects. Impact on Revenue and Earnings Growth

Assumptions

• Analysts are assuming Popular's revenue will grow by 12.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.6% today to 25.4% in 3 years time.
• Analysts expect earnings to reach $948.9 million (and earnings per share of $12.92) by about September 2027, up from $510.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2027 earnings, down from 13.7x today. This future PE is lower than the current PE for the US Banks industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The reliance on Puerto Rico government deposits, which drives higher net interest income (NII), could pose a risk if these deposits decrease more than expected, impacting NII negatively.
  
• Challenges in the U.S. market loan growth, especially in commercial real estate, could drag overall loan growth towards the lower end of guidance, potentially reducing revenues.
  
• An increase in professional fees and transaction-related costs could elevate operating expenses, negatively affecting net margins.
  
• Increased costs of deposits, both from re-priced government-related accounts and other deposits, might compress the net interest margin (NIM), impacting profitability.
  
• Potential future shifts in deposit mix towards higher-cost deposits and slower loan growth in the U.S. could reduce the effectiveness of strategies to expand NIM, limiting earnings potential.

Valuation

• The analysts have a consensus price target of $114.22 for Popular based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.7 billion, earnings will come to $948.9 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 5.8%.
• Given the current share price of $96.78, the analyst's price target of $114.22 is 15.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.