BB&T Corporation (BBT),Bank of America Corp (BAC): Don’t Stress, This Is A Short-Term Issue

When it comes to dividend payments, BB&T Corporation (NYSE:BBT)’s CEO Kelly King said he was pleased to have one of the highest yields and highest payout ratios. This is sort of backward thinking, as the company’s relatively high yield is a function of the stock not rising as much as some of its peers. Where the company’s payout ratio is concerned, the way I look at it, BB&T has plenty of room to raise the dividend further.

When calculating a free cash flow payout ratio, I only use net income plus depreciation, and then subtract capital expenditures. This eliminates some of the other adjustments to free cash flow that are not actual cash items. This also gives investors a good apples-to-apples comparison across multiple companies. Using this calculation and then taking the average payout ratio over the last four quarters shows BB&T is doing better than most.

In the last four quarters, only J.P. Morgan & Chase paid out a lower percentage of their adjusted free cash flow at 19.65%. BB&T paid about 25.35% of their adjusted free cash flow. Bank of America Corp. (NYSE:BAC)’s common stock dividend and preferred dividends actually used up 26.4% of that company’s free cash flow, and M&T paid almost 36% of their free cash flow. As you can see, BB&T could theoretically double their dividend and still pay just about 50% of their adjusted free cash flow.

A Great Value To Boot
BB&T Corporation (NYSE:BBT)’s stock value looks compelling, even with the company’s current dividend. With a yield of 2.98%, this beats all of their peers. Analysts expect 11.68% EPS growth in the next few years, which is second only to Bank of America Corp. (NYSE:BAC) at 18.7%.

What makes BB&T an even better value is that the stock sells for just 10.55 times projected earnings. Relatively speaking, only J.P. Morgan & Chase sells for a lower P/E ratio of 9.06. This short-term event gives investors a chance to buy BB&T at a slight discount to the price before the stress test. Long-term investors should jump at this chance to buy the “Best Bank In Town.”

The article Don’t Stress, This Is A Short-Term Issue originally appeared on Fool.com and is written by Chad Henage.

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