State Street Corporation (STT) is a financial services company that provides investment servicing, investment management, and investment research to institutional clients. The company has a strong track record of growth and profitability, and it is well-positioned to benefit from the current economic environment. State Street’s stock is currently trading at a relatively attractive valuation, making it an appealing investment opportunity.
Here are a few key factors that make State Street stock a solid investment option:
Revenue Strength:
Despite a decline in net interest revenues (NIR) over the past few years due to near-zero interest rates, State Street has demonstrated resilience. Its NIR experienced a three-year CAGR of 7.8% (ending in 2023). While rising funding costs and shrinking non-interest-bearing deposits are expected to impact NIR, the prolonged period of high interest rates is likely to provide some support. Projections indicate that NIR will remain relatively stable in 2024 and 2025, with a projected year-over-year growth of 3.4% in 2026.Furthermore, although total fee revenues declined in 2022 and 2023, they achieved a four-year (2019-2023) CAGR of 1%. State Street’s global presence and innovative product offerings, including the launch of State Street Digital and State Street Alpha, have positioned the company favorably in terms of fundamental business activities. These initiatives, coupled with business servicing wins and an inorganic growth strategy, are expected to contribute to continued fee income growth. The company anticipates total fee revenues to increase by 4.4% this year. Overall, State Street projects total revenue growth of 5.6% in 2024, 1.8% in 2025, and 3% in 2026, signifying a sustained upward trend.
Earnings Growth:
State Street has consistently demonstrated earnings growth, achieving a 5% increase over the last three to five years. Projections indicate adjusted earnings will rise by 4.6% this year, followed by 8.3% in 2025 and 15% in 2026. The company’s long-term (three to five years) estimated EPS growth rate of 7.6% promises attractive returns for investors.Business Restructuring Efforts:
State Street has been actively expanding its scale through both inorganic growth and business consolidation. In February, the company completed the acquisition of CF Global Trading, further bolstering its outsourced trading capabilities. Additionally, State Street has assumed full ownership of its two joint ventures in India as part of its ongoing initiative to optimize global operations. These strategic moves reflect the company’s commitment to streamlining its operations and enhancing its global reach.Impressive Capital Distributions:
State Street’s capital distribution plan is highly commendable. Following the clearance of the 2024 stress test, the company increased its quarterly dividend by 10% to 76 cents per share. This marks the fourth consecutive annual dividend hike of 10%. In January, State Street authorized a share repurchase program of up to $5 billion (with no expiration date), effective from the first quarter of 2024. As of June 30, 2024, nearly $4.7 million of this authorization remained available. The company plans to return 80-90% of its earnings to shareholders this year. Driven by its strong capital position and earnings strength, STT is poised to sustain improved capital distributions in the future.Strong Leverage:
State Street’s debt/equity ratio of 0.89 is lower than the industry average of 1.09, signifying a relatively lower debt burden compared to its peers. This position enhances the company’s financial stability in challenging economic conditions. As of December 31, 2023, STT held a total debt of $36 billion, while its cash and dues from banks and interest-bearing deposits with banks amounted to $102.8 billion. State Street also maintains investment-grade ratings of A1/A/AA- on senior debt from Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings, respectively.Stock Seems Undervalued:
Compared to the broader industry, State Street’s stock currently appears undervalued. The company’s price/book ratio of 1.09 is lower than the industry average of 1.26. Similarly, its price-earnings (P/E) (F1) ratio of 10.01 falls below the industry average of 12.05.Other Stocks Worth a Look:
In addition to State Street, two other top-ranked major bank stocks worth considering are The Bank of New York Mellon Corporation (BK) and JPMorgan (JPM). The Zacks Consensus Estimate for BK’s current-year earnings has been revised upwards by almost 1% over the past 30 days. BK’s shares have surged by 25.6% year-to-date, and the company currently holds a Zacks Rank #2. JPM also carries a Zacks Rank of 2, and estimates for its 2024 earnings have been revised 1% upwards over the past month. JPMorgan’s shares have rallied 26.2% year-to-date.
