Washington Mutual (WM)

Washington Mutual (WM) is the largest S&L in the country. The company has enjoyed excellent growth over the years (see chart).

However, that growth may be decelerating. A trendline drawn on the chart connecting the stock’s 1990 and 2000 price lows was penetrated in early 2005, and since then the price has moved sideways with a upward bias.

WM has a dividend yield of 5% as of the close on 19 Oct. and the beta is only .77. The company has an excellent history of raising their cash dividend, usually one cent every quarter, and there were six 50% stock dividends from 1986 to 2001. But the dividend payout ratio has been increasing.

After the close of trading on Oct. 18, WM announced that third quarter profit had declined to $0.77 per share as compared to $0.92 per share in the third quarter of 2005. It was stated this had to do with “ongoing efficiency initiatives”, which are expected to continue into the fourth quarter. The company says they are confident they will have stronger performance in 2007 despite the “challenging operating environment” (inverted yield curve and declining demand for loans?) and they have raised their dividend from .52 to .53 per share. This action increases the payout ratio to 69%. Study of the financial summary shows an increase in non-performing assets and a decline in loan activity.

The stock dropped more than 3% on Oct. 19. Still, it is trading less than 9% below its 52-week high.

WM’s dividend yield is tempting, but this is a “challenging operating environment” for investors! I could get interested in WM if the price goes down much more and I see evidence that the inverted yield curve is unwinding.

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