Why we’re not giving up on Laurentian Bank

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Wednesday May 15, 2019

Truth be known, we are getting older. It is hard to believe that we met more than 40 years ago at the University of Western Ontario. Key to our investing “techniques” in our teenage years was having enough money to ante up for the poker games in our residence, Saugeen-Maitland Hall, along with additional funds for our forays to Western Fair Raceway. C’mon, ya lazy pony! Get the lead out!

At this venerable stage of our lives, while we still follow the Contra methodology and focus on turnarounds, attempting to ensure a regular flow of income is becoming front and centre. For that reason, other stocks that have an excellent chance to continue paying regular dividends and might have a higher entry point have grabbed a place in our financial repertoire. This is not a change in the Contra system, but a supplement.

One stock that attracted us was Laurentian Bank, which we purchased between $37.76 and $39.56. The fat yield of better than 6.6 percent attracted us, though the ratio is slightly lower now that the stock trades around $42. We feel the price could climb back above $50, where we would likely sell, still a distance below the $60-plus that it reached in 2017.

The bank has taken a small hit lately. Although still profitable to the tune of $40.3 million this past quarter, that was a big drop from $59.7 million in the same period last year. This was also the third straight quarter with an earnings miss.

Further tough sledding is anticipated as the bank plans to cut about 10 percent of its work force, with associated payouts. Estimates are that this will save $15 million to $20 million annually. The objective is to raise profitability closer to that of peers by 2022.

Shorts, including The Big Short’s superstar Steve Eisman, disagree with this scenario. This stock has been on their radar, and they feel that when the housing market cracks, this bank is more susceptible to a steep fall than the Big Five. For example, RBC’s exposure to housing last year was 18.5 percent of total assets, while LB’s is about double that.

If real estate drops off significantly, the chatter in some circles is that LB will be forced to reduce the dividend. We do not think that a cut is in the cards, but it is not implausible and a possibility that should be considered.

Also worth recalling is that bank shares were shattered when the last recession hit. They will not be immune to a major downturn when the next one arrives.

One potential fly in the ointment that was avoided, making these shares more attractive, was a new agreement reached with the 38 percent of employees who are unionized. The deal was signed at the end of March, after more than a year of negotiations. LB is the only North American bank with a union, a group that formed in 1967.

There is no question that turning this ship around will take time. But with a handsome dividend, accompanied by the dividend tax credit, it makes for a pretty juicy return. Each of us is counting on this as part of his retirement package. Ideally, there will be enough of a cash payout that we can place the occasional across-the-board wager at the racetrack.