Pack Your Bags! A Huge Italian Dividend Awaits

Pack your bags!

This week we’re going to Italy.

It is going to be busy because there are so many things to see like the Colosseum, the canals in Venice, Pompeii and the Leaning Tower of Pisa…

It promises to be quite a trip.

But this trip isn’t going to be all play and no work.

No sir. We aren’t just going to Italy for those famous tourist attractions.

We are also going to collect a sizeable dividend.

The stock we are interested in is Intesa Sanpaolo (ISNPY), and its dividend is “molto bella,” which in Italian means “very nice!”

Read on below for details…

Intesa Sanpaolo — Italy’s Dominant Bank

With 11.8 million customers and 4,100 branches, Intesa Sanpaolo controls 25% of the banking business in Italy. That’s a dominant market position.

To compare, the three largest banks In the United States (Bank of America, JP Morgan and Wells Fargo) combine for a roughly 30% market share.1

But the reason we are talking about Intesa today isn’t just about its market share… It’s about its dividend.

Intesa’s current annual dividend payment is set at 85% of net income. Based on 2018’s full-year performance, that equates to a 9.7% yield!

Just look how this compares to the dividend yield of the three big American banks:

  • Bank of America — 2.03%
  • JPMorgan Chase & Co. — 2.80%
  • Wells Fargo & Company — 3.87%

Realistically, when you are locking in almost a double-digit return through the dividend alone, it is hard for an investment not to work out pretty well for you in the long-run.

But that’s not all…

Intesa’s Downside Is Limited

The dividend is fantastic, but it is also important to know that Intesa Sanpaolo is a very well-capitalized and very well-managed bank.

Evidence of both of these exists in the fact that Intesa went through both the global financial crisis and European sovereign debt crisis without requiring any capital infusions.

And it’s safe to say that the bank is in even better shape today.

Let me explain…

The financial strength of a bank is measured by its capital ratio. The capital ratio tells you how leveraged a bank is.

The smaller the number, the less capital the bank has and the more leverage it is using. The larger the number, the less leverage a bank has and the more financially stable it is.

Currently, Intesa has a capital ratio of 13.5%, which is almost 50% higher than the 9.33% required by European regulators for systemically important banks.

For some additional perspective, consider that the American banking sector went into the financial crisis with an average capital ratio of just 7%, so Intesa has almost twice the capital buffer than that!

Now Let’s Talk About the Upside…

Now that I’ve proven that Intesa’s balance sheet is in great shape, let’s look at why I believe shares could go much higher.

The reason is simple: Intesa makes A LOT of money… and its share price today doesn’t reflect it.

In 2018, reported net income for the bank was €4.05 billion — up 6% on the prior year — which equates to a price-to-earnings ratio of just 7.5x.

[Remember, price-to-earnings (or PE) ratios explain how much profit your company generates per dollar (or in this case euro) of cost. This is similar to price-per-pound labels at your local grocery store. The lower the PE ratio, the greater the value.]

For comparison, let’s again take a look at the big three American banks:

  • Bank of America — 10.88x
  • JPMorgan Chase & Co. — 11.9x
  • Wells Fargo & Company — 9.84x

At just 7.5 times earnings, Intesa is clearly a much better value than its American counterparts.

What more could you ask for?

With rock bottom valuation metrics, sizable profits, and a stable balance sheet, it seems to me that the downside from the current share price is minimal while the upside could be significant.

And with a near 10% dividend yield, investors don’t even need the share price to go anywhere to make owning Intesa shares rewarding.

So pack your bags and get ready to go. Intesa’s dividend can subsidize the cost of this summer’s European vacation.

While we’re there, hopefully we can enjoy a capital gain as Intesa’s share price rises from its current dirt-cheap valuation too!

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge

1 Market share of leading banks in the United States in 2018, by value of domestic deposits, Statista

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Jody Chudley

Jody Chudley is a contributing analyst to Lifetime Income Report and Contract Income Alert. Jody is a qualified accountant with a degree in Finance from Brandon University. After spending fifteen years in various finance and planning roles with an international financial institution, Jody set out to manage his portfolio on a full-time basis.

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