Beating Buffett

52-week range: $7.46 (Mar. 9, 209) - $18.93 (Nov. 4, 2008) 
Dividend = $0.15 quarterly = 4.55% current yield  
 

Hudson City Bancorp, Inc. offers offering traditional deposit products, residential real estate mortgage loans and consumer loans. In addition, the Company purchases mortgages and mortgage-backed securities and other securities issued by United States government-sponsored enterprises. Its revenues are derived principally from interest on its mortgage loans and mortgage-backed securities, and interest and dividends on its investment securities. They have about 131 branches in NY, NJ, and CT. HCBK converted from a chartered mutual savings bank into its current form in two stages. The first came in 1999 and the final step took place on June 7, 2005. 

In direct contrast to almost all other banks Hudson City posted record earnings in 2008 and is on track for another all-time high in EPS for 2009. In fact, 2009 will likely be the ninth consecutive year of improved earnings and increased dividends. This is quite a feat in light of the past few years housing market. 

As of year-end 2008 about 99% of HCBK’s loans were first mortgages and just 1% were consumer and other loans. They managed to sidestep the worst of the carnage through the use of old time banking standards. Forbes magazine called them “The Best Managed Bank in America” in both 2007 and 2008. 

Here are their impressive (split adj.) per share numbers as reported by Value Line: 

First half 2009 earnings per share were $0.52 versus $0.40 and Zacks now sees 2009 – 2010 EPS at $1.05 and $1.15 respectively. That puts HCBK’s multiple at< 12.6x this year’s and under 11.5x next year’s estimates. Compare those P/Es with all the historical valuations in the chart above. HCBK shares are near the cheapest they’ve ever been. 

Dividends were initiated in 2000 and have been raised in each year since. The current yield of 4.55% is better than the interest rates on bank CDs, treasury notes and virtually everything else without high risk. It’s also the best yield in HCBK’s history as seen from the chart above. 

Value Line notes Hudson City’s financial strength as B+ and gives them 90^th percentile rankings in both ‘stock price stability’ and ‘earnings predictability’ (with 100^th being best). HCBK shares have outperformed 80% of the 1700 stocks in Value Line’s research universe on a long-term basis. Morningstar sees ‘fair value’ for Hudson City as $15/share. 

A rebound to just fourteen time 2010 estimates of $1.15 would see HCBK back above $16 /share within about 15 – 18 months. Add in the generous dividend yield and this looks like an attractive total return stock. 

Is a $16 target price reasonable? Sure. HCBK shares touched highs of $16.10, $25.00 and $15.90 in calendar 2007-2008 and 2009 YTD. With earnings and dividends now better than ever before, there is no reason these shares shouldn’t attain at least their old highs. 

Here’s a way to play with even less risk…