6 Reasons to Bet on State Street Stock Right Away

It is a good idea to add State Street STT stock to your portfolio now as it benefits from solid business servicing wins, strategic acquisitions, global reach and efforts to technologically upgrade operations. Its steady capital distribution activities are likely to continue enhancing shareholder value.

Analysts seem optimistic about the company's earnings growth prospects. Over the past 30 days, the Zacks Consensus Estimate for earnings has been revised marginally upward for 2024 and 2025. The stock currently carries a Zacks Rank #2 (Buy).

So far this year, shares of STT have rallied 3.8%, underperforming the industry's growth of 19.4%.

Image Source: Zacks Investment Research

Here are a few factors that make State Street stock a solid investment option.

Revenue Strength: While the company's net interest revenues (NIR) declined over the past couple of years because of near-zero interest rates, the metric witnessed a three-year (ended 2023) CAGR of 7.8%. Though rising funding costs and shrinking non-interest-bearing deposit balance are expected to weigh on NIR, high interest rates for a longer period are likely to offer some support. We project NIR to be relatively stable in both 2024 and 2025. In 2026, the metric will grow 3.4% year over year.

Likewise, while the company's total fee revenues declined in 2022 and 2023, the same saw a four-year (2019-2023) CAGR of 1%. The company is well-positioned with respect to fundamental business activities, given its global exposure and a broad array of innovative products and services (including the launch of State Street Digital and State Street Alpha). These efforts, along with business servicing wins and an inorganic growth strategy, are expected to keep aiding fee income. We anticipate total fee revenues to grow 4.4% this year.

Our projections for total revenues suggest year-over-year growth of 5.6%, 1.8% and 3% for 2024, 2025 and 2026, respectively, and ensure the continuation of the upward trend.

Earnings Growth: State Street recorded earnings growth of 5% over the last three to five years. We project adjusted earnings to rise 4.6% this year. Further, in 2025 and 2026, the metric will grow at the rate of 8.3% and 15%, respectively.

Also, the company's long-term (three to five years) estimated EPS growth rate of 7.6% promises rewards for investors.

Business Restructuring Efforts: State Street has been expanding its scale inorganically and through business consolidation. In February, the company announced the completion of its acquisition of CF Global Trading, which will further expand outsourced trading capabilities. As part of the consolidation of its India-based operations, the company has assumed full ownership of its two joint ventures. These are part of the company's ongoing initiatives to optimize its global operations.

Impressive Capital Distributions: State Street's capital distribution plan is solid. Following the clearance of the 2024 stress test, State Street increased its quarterly dividend by 10% to 76 cents per share. This was the fourth consecutive annual hike in the dividend payout by 10%.

In January, the company authorized to repurchase shares worth up to $5 billion (with no expiration date), effective from the first quarter of 2024. As of Jun 30, 2024, almost $4.7 million worth of authorization remained available. Further, the company plans to return 80-90% of its earnings to shareholders this year. Driven by a strong capital position and earnings strength, STT is expected to sustain improved capital distributions in the future.

Strong Leverage: State Street's debt/equity ratio is 0.89 compared with the industry average of 1.09. This indicates that STT has a relatively lower debt burden compared with peers. Thus, the company will be more financially stable in adverse economic conditions.

Further, as of Dec 31, 2023, STT had a total debt worth $36 billion, while cash and dues from banks and interest-bearing deposits with banks were $102.8 billion. STT also maintains investment-grade ratings of A1/A/AA- on senior debt from Moody's Investors Service, Standard and Poor's and Fitch Ratings, respectively.

Stock Seems Undervalued: The State Street stock seems undervalued right now when compared with the broader industry. The company's price/book ratio of 1.09 is lower than the industry average of 1.26. Also, its price-earnings (P/E) (F1) ratio is 10.01, which is below the industry average of 12.05.

Other Stocks Worth a Look

A couple of other top-ranked major bank stocks are The Bank of New York Mellon Corporation BK and JPMorgan JPM.

The Zacks Consensus Estimate for BK's current-year earnings has been revised almost 1% north over the past 30 days. The company's shares have rallied 25.6% so far this year. BK currently carries a Zacks Rank #2.

JPM also carries a Zacks Rank of 2 at present. Estimates for the company's 2024 earnings have been revised 1% upward over the past month. In the year-to-date period, JPMorgan's shares have rallied 26.2%.

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