Updated on July 12th, 2021 by Bob Ciura
Banks in the US are generally well regarded when it comes to income investing. They tend to pay decent yields, and the best run banks offer relative dividend security, as well as the potential for dividend growth. Internationally, banks have proven riskier due to a variety of factors, including geopolitical risk, localized economic weakness, currency risk, and others.
Itau Unibanco (ITUB) is a Brazilian bank that pays a relatively small dividend to shareholders, but one that is quite secure. In addition, it pays its dividend monthly, instead of quarterly, allowing for faster wealth compounding and current income.
Itau Unibanco is one of only 51 stocks we cover that makes monthly dividend payments. You can download our full list of 51 monthly dividend stocks (along with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the link below:
Despite the payout ratio being extremely low, and therefore implying high levels of dividend safety, we see many growth challenges ahead for Itau Unibanco. With the earnings outlook quite murky, and Brazil’s economic growth in doubt, we have concerns about the bank’s near-term future.
Given this, we are cautious on Itau Unibanco’s prospects as an investment at this time, despite its attractive monthly payout schedule.
Itau Unibanco is a very large bank that is headquartered in Brazil. It generates in excess of $21 billion of revenue annually. ITUB is a large cap stock with a market capitalization above $50 billion.
Itau Unibanco conducts business in more than a dozen countries around the world, but the core of its business is in Brazil. It has significant operations in other Latin American countries, as well as select businesses in Europe and the US.
Its scale is huge in relation to other Latin American banks. Itau is the largest financial conglomerate in the Southern Hemisphere and the world’s 10th–largest bank by market value, and the largest Latin American bank by assets and market capitalization.
The bank offers an impressive list of services to its customers, running the entire spectrum of financial products. This huge list of offerings has helped Itau Unibanco grow to the size it is today, while also diversifying its revenue streams.
Its business has two main segments – Retail Banking and Wholesale Banking. Retail Banking serves smaller, mostly consumer accounts, while Wholesale Banking serves larger, mostly business accounts. The retail business produces about two-thirds of the company’s total net income, with the wholesale business making up the balance.
Both are critically important to the bank’s profit outlook, but like many other large banks, Itau Unibanco’s business is heavily dependent upon consumers.
Given Itau Unibanco’s reliance upon Brazil and other South American countries for its earnings, we have significant concerns about its ability to grow.
Itau Unibanco’s strategy of trying to be everything to every consumer and business isn’t unusual in the world of banking. The major US banks have adopted a similar strategy over time, providing core banking services like deposits and loans, but also insurance products, equity investing, and a host of other products to help attract customers.
However, what sets Itau Unibanco apart is its exposure to emerging economies, rather than established ones in Europe or the US.
Indeed, Brazil’s economy has struggled for many years, and many of the other countries Itau Unibanco operates in are in similar, if not worse, situations.
This is a primary concern for us regarding the company’s ability to grow, because the business model of a bank requires broad economic growth for its own expansion. Without this growth, Itau Unibanco will have a difficult time producing profit expansion.
Fortunately, the company generated modest revenue growth in the most recent quarter.
On May 3rd, 2021, Itaú Unibanco reported first–quarter results for the fiscal year 2021 results. Operating revenues were up 2.8% compared to the first quarter of FY2020. The biggest growth driver was managerial financial margin, which saw a 4.7% increase compared to 1Q20. This segment makes up 66% of operating revenues.
Another positive was that the cost of credit declined significantly for the quarter. The company reported a cost of credit of $(773) million compared to a loss of $(1882) million year over year. Income before tax also improved with an increase of 124% compared to the FY2020 first quarter.
Loans increased 2.5% in Brazil, thanks in large part to 12.1% growth in mortgage loans. Recurring managerial return on equity was 18.5% compared to 16.1% in 4Q20 and 15.7% in 3Q20.
We see the path to any growth ahead for Itau Unibanco as difficult, and expect 1.5% annual EPS growth over the next five years. Under normal conditions, we still expect the bank to struggle to grow.
Itau Unibanco has a conservative approach to paying its dividend. The bank pays out dividends to shareholders based upon its projected earnings and losses, with the goal being the ability to continue to pay the dividend under various economic conditions.
Along with providing its recent quarterly results, the company also increased its monthly dividend from $0.0026 per share per month to now $0.008 per share per month. This represents a dividend increase of 220%. Still, the yield is relatively low at ~1.8%, although this does exceed the average S&P 500 yield.
Thus, Itau Unibanco isn’t a pure income stock by any means, as its yield is simply too small to be attractive to income investors.
On the plus side, the very small yield affords the bank better dividend coverage. Current estimates for this year are for $0.48 per share in earnings, good for a payout ratio of just ~20%. We therefore do not see any risk of a dividend cut today, but we are also cautious on future growth given the uncertain outlook for Brazil’s economy.
Thus, we do not believe income investors should be interested in Itau Unibanco stock, due to its fairly low yield and the number of elevated risk factors.
We see a difficult road ahead for Itau Unibanco. With low projected earnings growth under normalized conditions, as well as a diminutive yield, we don’t view this stock as attractive.
At the same time, buying international stocks carries multiple unique risk factors, including geopolitical risks and currency risk, among others. Itau stock does provide geographic diversification for investors who are particularly interested in investing outside the United States.
However, the risks seems to outweigh the potential rewards for this stock. Given all of the above factors, we recommend investors avoid Itau Unibanco, despite its monthly dividends.