Updated on April 23rd, 2021 by Felix Martinez
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.
Itaú 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.
Itaú Unibanco is one of only 50 stocks we cover that makes monthly dividend payments. You can download our full list of 50 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 Itaú 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 Itaú Unibanco’s prospects as an investment at this time, despite its attractive monthly payout schedule.
Itaú 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 $51 billion.
Itaú 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. Itaú 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 Itaú 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, Itaú Unibanco’s business is heavily dependent upon consumers.
Given Itaú Unibanco’s reliance upon Brazil and other South American countries for its earnings, we have significant concerns about its ability to grow.
Itaú 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 Itaú 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 Itaú Unibanco operates 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, Itaú Unibanco will have a difficult time producing profit expansion.
Fortunately, the company generated modest revenue growth in the most recent quarter.
On February 11th, 2022, Itaú Unibanco reported fourth–quarter results for the fiscal year 2021 results. The company reported an increase in 0perating revenue from $1,066 million in 4Q2020 to $1,417 million last quarter, increasing 32.9% year-over-year. For the year, operating revenue is up 9.4% compared to the entire year of 2020.
Loan operations continued to grow, and the company’s loan portfolio was up 7.9% in Brazil and 6.7% overall. The individual loan portfolio was up 9.5% in the quarter. Also, the credit card portfolio increased 15.5%, with seasonality pushing it higher at the end of the year.
The bank continues to make significant headway on the digital front. In the fourth quarter, 63% of products purchased by individuals were made digitally. Net income for the quarter was up 32.9% versus the fourth quarter of FY2020. For the year, net income is up 45% versus 2020.
Personal loans grew 9.6%, with significant increases in credit lines with better spreads, such as overdraft and consumer credit. Mortgage loans grew 8.3% this quarter, with a high production level throughout 2021.
Itaú earned $0.52 per share for the entire year of 2021, a meaningful increase of 78% compared to FY2020. Thus, we expect the company to earn $0.59 per share for the whole year of 2022. This is still lower than what the company made pre-COVID-19.
We see the path to any growth ahead for Itaú 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.
Source: Investor Presentation
Itaú Unibanco has a conservative approach to paying its dividend. The bank pays out dividends to shareholders based on 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 decreased its monthly dividend from $0.0034 per share to $0.0027 per share. Still, the yield is relatively low at ~1.1%.
Thus, Itaú Unibanco isn’t a pure income stock by any means, as its yield is simply too small to be attractive to most income investors.
On the plus side, the very small yield affords the bank better dividend coverage. Current estimates for this year are for $0.59 per share in earnings, good for a payout ratio of just ~15%. We, therefore, do not see any risk of a dividend cut today, but we are also cautious about future growth given the uncertain outlook for Brazil’s economy.
Thus, we do not believe income investors should be interested in Itaú Unibanco stock, due to its fairly low yield and the number of elevated risk factors.
We see a difficult road ahead for Itaú 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 risks, among others. Itaú stock does provide geographic diversification for investors who are particularly interested in investing outside the United States.
However, the risks seem to outweigh the potential rewards for this stock. Given all of the above factors, we recommend investors avoid Itaú Unibanco, despite its monthly dividends.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 40 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: