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The Bank of New York Mellon Corporation (BK) released its Q4 and FY2018 results on January 16th in which it reported mixed underlying results. While revenue declined it benefited from strong expense control and a lower tax rate.

BK rewarded common shareholders with $3.3B in common shares repurchased and $1.1B in dividends in FY2018.

In December 2018, BK announced that it had received approval to immediately increase its repurchase program of common stock by up to an additional $0.83B through Q2 2019.  These repurchases are in addition to the repurchase of $2.4B of common stock previously announced June 28, 2018.

Berkshire Hathaway's most recent Form 13F filing indicates it now holds just under 78 million BK shares.

 

Summary

  • BK’s Q4 and FY2018 results released January 16, 2019 reflected a mixed underlying performance.
  • Revenue declined but BK maintained strong expense discipline and benefited from a lower tax rate.
  • BK continues to reward shareholders with $3.3B in common shares repurchased and $1.1B in dividends distributed to common shareholders in FY2018.
  • On December 10th, BK announced that it had received approval from the Federal Reserve and its Board of Directors to immediately increase its repurchase program of common stock by up to an additional $0.83B through Q2 2019.  These repurchases are in addition to the repurchase of $2.4B of common stock previously announced June 28, 2018.
  • Berkshire Hathaway held sub 2 million BK shares as per its Form 13F filing dated September 30, 2010. Its most recent filing reflects a holding of just under 78 million BK shares.
  • I view BK as fairly valued and an appropriate holding for investors with a long-term investment time horizon.

Introduction

On January 16, 2019, The Bank of New York Mellon Corporation (NYSE: BK) released its Q4 and FY2018 results. BK, the world's largest custodian bank, has indicated that Q4 net income applicable to common shareholders fell to $0.832B, or $0.84/share, from $1.13B, or $1.08/share a year earlier.

At first blush some investors might look at BK’s results and be concerned. Upon further review, however, we see that BK benefited last year from a one-time gain due to a change in U.S. tax laws.

In my previous BK related article My Favorite Investors Appear to Really Like This Company I concluded with:

‘BK was trading at ~$57 when I wrote my January 21, 2018 ‘High Entry Barriers Work in Its Favor’ article but with the recent pullback I now view the shares as fairly valued. I intend to acquire more shares for the retirement account which currently holds BK shares.’

In keeping with my disclosure that I would be acquiring additional BK shares…I did…at roughly the same price as the current ~$50.43.

Now, many investors will go to their stock screener, will look up BK, and the first thing they will look at is the dividend yield. They will see that BK’s dividend yield is sub 2.50% and immediately discard BK as a potential investment.

Fair enough. We all have our own goals and objectives when it comes to investing and I know many investors are trying to generate a reasonable level of income from their equity investments.

My concern with this method of identifying potential companies in which to invest is that focusing exclusively (almost exclusively) on high dividend yielding companies is likely going to take an investor beyond their TRUE ‘comfort zone’.

While 7%+ dividend yields might certainly be enticing, one must not forget that a coin has two sides. Let’s call them ‘reward’ and ‘risk’.

Based on my personal observations I long ago came to the realization that many retail investors truly over estimate their tolerance for risk. In fact, I recently wrote If It Looks Too Good To Be True It Probably Is in which I provided my opinion on two companies with 9%+ dividends yields that had been recommended by a highly followed website.

I have also recently corresponded with several readers of this blog inquiring about my opinion about high dividend yielding stocks.

I certainly do not profess to be able to make the right call all the time. As an investor, however, who retired in his mid 50s (spouse retired in her early 50s) with absolutely no interest of ever returning to the workforce on a part-time or full-time basis, I must rely on dividend and rental income to service our ongoing obligations. Suffering a permanent impairment to our capital by investing in higher risk companies is not something I take lightly. I am, therefore, inclined to gravitate toward companies with strong Free Cash Flow, a relatively low dividend yield (typically sub 3.5%), strong competitive advantages, a track record of dividend increases over the long-term, etc..

As a result, I have not relegated BK to the ‘not interested’ bucket of companies. In fact, I purchased several hundred BK shares on December 30, 2010 and again on September 8, 2011. One quick look at BK’s long-term stock chart will reveal that BK was not exactly at the top of the investment community’s mind around the time I acquired shares.

I have also made a few smaller additional purchases and have also been reinvesting all dividends.

Now that BK has just released its FY2018 results I am taking this opportunity to revisit BK.

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Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long BK.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.