If, at any time between 1920 and 1985, you were a member of a wealthy Atlanta household, the odds were strong that your family owned stock in both Coca-Cola and the Trust Corp. of Georgia. Investing in the powerhouse conservatively managed stocks was just something you did, practically on autopilot.
And for about seven decades, the Trust Corp. of Georgia was as beautifully boring as its name suggests. It would make about 5-6% more loans per year, grow profits anywhere between 5-9% per year depending on interest rates and the strength of the economy, and the investors would collect a 2-4% cash dividend. All told, it was a solid way to own a great asset that would compound at 7% to 13% per year. And you would get the benefit of participating in your community’s growth.
That all changed in 1985, when the Trust Corp. of Georgia decided to merge with Sun Banks of Florida. Hence the name SunTrust.
This merger was billed as an opportunity to create a Southern banking powerhouse. A stodgy Georgia firm blended with a fast-growing Florida firm had tremendous marketing appeal for stock brokers–you could talk about the fast-growing Sun Banks assets when you were speaking to an investor who wanted growth, and you could speak about fortress-like Trust Corp. assets when you were trying to unload a couple hundred shares to a retiree that you had on the phone.
Even though the bank is located in Georgia and retains many of the outward appearances of its Georgia lineage, make no mistake that the Florida management team infiltrated the culture.
Now, Suntrust “rides” the waves. If the economy collapses, it will collapse too. That’s what happened in 2008-2009, when the stock price fell from a high of $94 in 2007 to a low of $6 as $2 billion in net profits instantly turned into $1.5 billion in losses. The $2.92 annual dividend was slashed to $0.04.
A decade later, as the economy has recovered, earnings have roared back to $2.6 billion. The reason the stock price is at $74, rather than $94, even though the bank is earning $600 million more in profits, is due to dilution. Suntrust had to issue 150 million shares at rock bottom prices in 2009 to stay solvent.
And, of course, now that the stock price is in the $70s, the company is repurchasing as much stock as it can ($660 million this year) and hiking the dividend 20%, from $1.60 to $2 per share.
It is not a stock you can buy without making some type of macroeconomic forecast. If the world booms, SunTrust will boom. If the world economy vomits, the value of those SunTrust stock certificates will go right down the toilet with it. That is probably why you rarely see a famous value investor own this stock–the asset is arranged to give you an exaggerated version of whatever economic conditions prevail. Even right now, it is in the process of lowering its lending quality standards, putting out a press release that is bragging about its historically low default rates, blissfully ignoring that is a trap that appears near tops of business cycles.
I feel bad for the investors that trusted in the Trust Corp. of Georgia’s management team, only to see it cast aside over the past three decades. When the name stays partially the same and the headquarters location is maintained, it is understandable to expect the show to go on. It requires unusually discerning skill to recognize when a conservative asset is about to become aggressive, and it almost always requires that you study the backgrounds of the individuals in the c-suite executives.
If I were forced to make a prediction, I would guess that the stock will rise the tide across $100 per share, and during the next crisis, fall below $50. The next fiteen years of stock trading will look like climbing and descending a mountain.
The good news is that, as the great Samuel Johnson said, the world endures because a new man rises after another one falls. The Trust Corp. of Georgia may not have abandoned its gibraltar-like heritage, but others like M&T Bank (MTB) have risen in their stead. M&T Bank is so powerfully it didn’t even have to cut its dividend during the financial crisis because it was still profitable. The joy of prosperity during calamity should exceed the pain of not getting as rich as the other guy during when all appears prosperous.
Originally posted 2018-08-30 01:00:56.