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Wall Street, California | Stock Exchange: James Peltz
and Michael Hiltzik

Big Opportunities for Bank, but Things Could Be Sticky for 3M

May 11, 1999|James Peltz and Michael Hiltzik | Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks

Washington Mutual (WM)

Jim: Answer me this, Mike: Can you name one Southern California savings and loan that isn't owned by Washington Mutual?

Mike: Well put. You know, the thrift industry has gotten a lot easier to think about since this juggernaut vacuumed up just about every S&L in the region.

Jim: It's been on an acquisition binge for years. Along the way it has gobbled up American Savings, Great Western Financial and Home Savings' parent, H.F. Ahmanson.

Mike: And those three outfits were among the biggest U.S. thrifts, so naturally Washington Mutual is now No. 1, with a whopping $175 billion in assets and 2,000 branches in nearly 40 states.

Jim: To me, Washington Mutual is still a work in progress, because it's still digesting Home Savings and other properties. It's faced with closing overlapping branches, converting to a central computer system, cutting jobs and otherwise wringing out excess costs. Those actions bite into earnings, but I still like this stock.

Mike: Me too. Sooner or later the rationalization of this Seattle-based giant will be completed, and then Washington Mutual will be sitting pretty. Also, the stock is cheap, and right now it has a friend in the powerful U.S. economy.

Jim: Although Wall Street's gotten nervous about the upturn in interest rates in recent months. Higher rates can hike up a thrift's cost of doing business by making it more expensive to obtain the cash it needs to lend out in mortgages and other loans. That's one reason Washington Mutual's stock has lost 15% over the last year and now trades in the low 40s, or about 12 times '99 earnings.

Mike: Which is typical of Wall Street's narrow-minded, short-term vision. Interest rates are bound to fluctuate, but I don't see a long-term threat to Washington Mutual's health.

Jim: And there's no indication that the pace of housing sales, and thus mortgage loans, will turn soft any time soon.

Mike: Absolutely not. Housing is booming, particularly in this region, and now Washington Mutual is in a perfect position to capitalize.

Jim: Here's my case for Washington Mutual: If you back out all of its one-time expenses related to its acquisitions and whatnot, the thrift just posted its best first quarter in its history, with operating earnings jumping 16% from a year earlier.

Mike: They also bested analysts' forecasts.

Jim: Also, the benchmark performance indicator of a bank or S&L is its return on average assets, which basically measures how well it deploys the assets at its disposal.

Mike: Anything above 1% is considered a strong showing.

Jim: Exactly, and in the first quarter, Washington Mutual's ROA rose to 1.08% from 0.99% a year earlier. Finally, it just announced a 20-million-share buyback program.

Mike: Right, though that buyback did raise questions about whether Washington Mutual's capital base was strong enough to support a buyback that size. But those questions are fading.

Jim: This is the time to buy the stock, because it's somewhat depressed and you can get in before Washington Mutual finishes swallowing Home Savings. After that, this outfit will sizzle and everyone will be piling on.

Mike: In a way, this stock reminds me of one we recommended a few months ago, Chase Manhattan. It too was victimized by a lack of favor for financial stocks on Wall Street at the time. But Chase had sown the seeds of strong growth, which it soon began reaping.

Jim: And, I'm happy to say, gave us one of our best picks.

Minnesota Mining & Manufacturing (MMM)

Jim: First of all, this manufacturing legend is long overdue for a name change. Can't they get rid of this mouthful of a name and just go with 3M Corp. or some such, since everyone calls it 3M anyway? I mean, AT&T and ITT did it.

Mike: You're probably right. If you ask the average person on the street what 3M stands for, probably only a champion from "Jeopardy!" or "Win Ben Stein's Money" would know.

Jim: Or Ben Stein himself, since he was one of the best financial writers around until he turned into a game-show host.

Mike: Right. Now here's my question about 3M... . .

Jim: Shoot.

Mike: Is this company going to give the "Dogs of the Dow" theory even more publicity?

Jim: Enlighten us.

Mike: OK. This theory of investing--which has a sizable cult following--involves starting the year by buying the 10 stocks in the Dow Jones industrial average with the highest dividend yields.

Jim: 3M being a Dow component, of course.

Mike: Right. In other words, you're picking the 10 Dow stocks trading at the largest measurable discount to their theoretical real value because, all else being equal, as your stock price goes down your dividend yield--the dividend divided by the stock price--goes up. And what you're betting on, of course, is that your 10 dogs will revert to the mean over the following 12 months, gaining in price to eliminate that discount.

Jim: 3M's yield is currently just under 2.5%, which is indeed high.

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