We've already kicked off our coverage of the financial sector's earnings season, with some of the titans like Goldman Sachs Group Inc (NYSE: GS) among the heaviest traded stocks this week. But there's one bank stock, whose roots go back even further than Goldman, that we think has been flying under the radar.
Bank of New York Mellon Corp (NYSE: BK), whose headquarters are across the road from Goldman's in downtown Manhattan, commands a smaller market cap than most of its better-known peers but has been performing just as well as them. While the likes of Bank of America Corp (NYSE: BAC) shares are down 5% since January, BNY Mellon's are flat, just like those of Goldman.
And while the latter just reported earnings that were way below what analysts were expecting, BNY Mellon just crushed theirs. Let's jump into them and take a look at some other reasons why we think BNY Mellon could be one of the better picks for the second half of 2023.
For starters, they just caught analysts by surprise in the best possible way. Both topline revenue and bottom-line EPS came in higher than expected when they reported on Tuesday, with their net interest revenue, in particular, showing solid year-on-year growth of 33%.
And even the stuff that came after the headline numbers made for good reading. The company's focus on revenue growth and expense discipline has been paying off, as seen by its positive operating leverage and pre-tax margin of 30%. The fact that EPS grew by 26% year over year speaks for itself, especially when compared to the 65% drop Goldman's EPS experienced.
Looking ahead, solid momentum is expected to result from their recently launched solutions, such as Pershing's innovative Wove advisory platform, which is expected to contribute to future revenue growth from 2024 and beyond. But the best bit? Having passed the Federal Reserve's 2023 bank stress test, BNY Mellon saw fit to increase its dividend by 14%.
A dividend increase is one of the most bullish signals that a company can give to the market and is seen as a good sign by investors because it shows the company is doing well financially and expects to continue performing strongly in the future. Investors like dividend increases because it means they get higher returns on their investments as well as a confidence boost about the company's long-term prospects.
For those of us on the sidelines, it can often be the green light needed to get involved in a stock. At 3.70%, BNY Mellon now offers one of the highest yields out of all the major financial stocks, which will only serve to attract even more buyers.
In addition to the dividend increase, the bank's leadership also reaffirmed their commitment to the existing share buyback program, which has been ongoing since January. Just like with dividend increases, buybacks are considered bullish signals because they indicate a company's confidence in its value and financial health - yet another feather in BNY Mellon's cap.
For all that, though, their shares are still down 30% from last year's all-time high. This is despite the fact that last quarter's revenue effectively matched their all-time record from December 2019. All in all, this is a bank stock that has a lot going for it, and we see the buying momentum that has sent shares up 25% since last October continuing through the summer.
Look for shares to tick back up toward $50, which is where they topped out at the start of the year. If they can consolidate and hold around there, there's no reason we won't see them continue toward their all-time high in the $60s.