We have maintained our long-term 'Neutral' recommendation on
Washington Federal Inc.
) reflecting the company's continued capital deployment
activities, strategic acquisitions and balance sheet
restructuring initiatives. Yet, once the rates start rising, the
company's deposit re-pricing efforts will likely undermine its
Washington Federal continues to be an asset for yield seeking
investors. In 2011, the company increased its quarterly cash
dividend by 33% to 8 cents per share and has ever since
maintained the same level. Further, the company continues to buy
back shares. In fiscal 2012, the company returned about 55% of
earnings to its shareholders in the form of dividends and share
repurchases. We expect management to continue to effectively
deploy excess capital going forward.
Further, Washington Federal's credit quality continues to improve
with the contraction of nonperforming assets and net charge-offs.
Also, in response to stabilizing credit conditions, the company
has been lowering its provision for loan losses in the last few
quarters. We expect the credit quality to continue to improve in
the subsequent quarters with a gradual recovery in the housing
Additionally, Washington Federal is steadily gaining market share
through strategic acquisitions. Historically, the company has
grown with the help of mergers and assumptions of deposits. These
have helped the company to increase its assets, branch network
and workforce, and thereby improve its financials.
On the flip side, a vast majority of Washington Federal's loan
portfolio comprises high quality single-family residential loans.
A large percentage of non-acquired and non-accrual loans form a
part of this portfolio. Though the company has been reducing its
exposure to these loan portfolios, we do not expect a significant
reduction anytime soon.
Moreover, most of Washington Federal's assets are conservative
long-term investments such as prime residential mortgage loans
and AAA-rated mortgage-backed securities that return a fixed rate
and pay off slowly. As these assets are funded largely by
customer deposits with maturities of one year or less, rising
interest rates will compress the margin between fixed asset
returns and variable funding costs, putting pressure on profit.
Washington Federal currently retains a Zacks #3 Rank, which
translates into a short-term Hold rating. Among its peers, the
Zacks #2 Ranked (short term Buy) stocks include
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