#Investment Thesis
We recommend a Buy rating for Capitol Federal Financial Inc. (NASDAQ: CFFN) with a target price of $11.57, reflecting an 5.4% undervaluation based on the current market price of $10.95. This recommendation is supported by several key factors:
- Dividend Yield: Capitol Federal offers a higher Dividend Yield % compared to its competitors, making it attractive for income-focused investors.
- Inflation Impact: Despite a 40-year high U.S. Inflation Rate of 7.5%, which may increase operating costs by 4%, CFFN’s strategic positioning and dividends offer a solid value proposition.
#Dividend Discount Model (DDM) Valuation
The Dividend Discount Model (DDM) was used to value Capitol Federal Financial Inc. (CFFN), focusing on the company’s consistent dividend payouts. The DDM provides a reliable valuation framework, particularly for companies like CFFN that have a strong history of returning value to shareholders through dividends.
- Current Market Price of CFFN is $10.95 per share, while the DDM model implies a value of $11.67 per share, suggesting the stock is undervalued by approximately 7%.
- Key inputs include a risk-free rate of 2.03%, market risk premium of 5.8%, and an adjusted beta of 0.53.
- Cost of Equity is calculated at 5.11%, and the WACC is determined to be 5.1%.
- Dividend per Share is $0.69, with a Dividend Payout Ratio of 171%, reflecting the company’s strategy of returning substantial earnings to shareholders.
#Homes/MBS Model
The Homes Model leverages a regression analysis based on home sales and sales volume to project the share price of Capitol Federal Financial Inc. for 2022. By analyzing historical data from 2010 to 2021, we identified significant correlations between these variables and CFFN’s share price.
- The regression analysis yields a Multiple R value of 0.729 and an R Square value of 0.531, indicating a moderate level of correlation and explanatory power.
- Projected sales for 2022 are estimated to grow by 3.44% based on a five-year weighted average growth rate.
- Sales volume for 2022 is projected to increase by 11.19%, also based on a five-year weighted average.
- The model predicts a target share price of $10.67 for 2022, derived from the regression equation using these projections.
#Balance Sheet Projections
The balance sheet projections for Capitol Federal Financial Inc. provide a comprehensive view of the anticipated financial performance from 2019 to 2026. Key metrics such as total assets, interest-earning assets, deposits, and term borrowings are projected, offering insights into the company’s strategic financial planning and growth trajectory.
- Interest-earning assets are projected to grow at an average rate of 3.25% annually from 2022 to 2026, reaching approximately $10.88 billion by 2026.
- Non-maturity deposits are expected to constitute around 42-43% of total deposits, with an average yield rate of 0.56% over the projection period.
- Total deposits are projected to grow at an average rate of 1.12% annually, amounting to approximately $8.85 billion by 2026.
- Term borrowings are anticipated to maintain a steady yield rate of around 2.00%, with the total amount increasing to $1.95 billion by 2026.
#Tools and Skills Used
- Financial Modeling: Developed and analyzed Dividend Discount Models (DDM) and Home Sales Valuation Models to derive accurate valuations for Capitol Federal Financial Inc.
- Data Analysis: Conducted regression analysis to project sales growth and evaluate the correlation between home sales volume and share prices.
- Market Research: Performed in-depth market analysis to understand the competitive landscape and macroeconomic factors affecting Capitol Federal Financial Inc.
- Strategic Planning: Evaluated and articulated Capitol Federal Financial Inc.’s strategic initiatives, including growth strategies and risk management.
- Report Writing: Compiled comprehensive investment reports with clear, data-driven recommendations for Capitol Federal Financial Inc.
- Presentation Skills: Created compelling visualizations and summaries to effectively communicate findings and strategic insights to stakeholders.
- Software Proficiency: Utilized financial software and tools, including Excel, for data analysis, modeling, and visualization, ensuring accurate and efficient analysis.
- Project Management: Managed the project timeline, ensuring thorough analysis and timely completion of the report while coordinating efforts across the team.
#Conclusion
- Target Price: $11.57 (5.4% upside).
- Drivers: Strong dividend yield, effective cost management, and strategic asset cap management to avoid regulatory pressures.
- Approach: Comprehensive analysis utilizing Dividend Discount Model (DDM) and Home Sales Valuation, providing a robust assessment of Capitol Federal Financial Inc.’s potential.
- Robust Valuation: Through the combination of DDM and Home Sales Valuation, our analysis highlights Capitol Federal Financial Inc.’s strong potential for growth and stable returns in the current economic climate.
#Appendix:
