TFSL Discussion

So I promised to come back with my take on TFSL. I understand this is not a typical stock for this board but I really appreciate the efforts that are put into making this board interesting and educational so I kind of feel like I need to do what I can. I do feel that this is both a misunderstood stock and significantly undervalued stock due to it’s conversion from a mutual company.
I have talked before about how this savings and loan had converted from a mutual holding company and the benefits of such a conversion. Since the employees and customers essentially own a mutual holding company, when they decide to convert, the cash from the conversion goes back to the Savings and Loan. This causes a lot of excess cash on the books. One option that has been adopted to keep this a little more reasonable, is to complete the conversion in two steps. Selling only a portion of the stock in the first step and then doing a second step with the remainder at a later date. That is what happened here and TFSL has simply chosen to not complete the second step (at least any time soon).
So at present about 80% of the total shares on the books are still owned by the bank. Well, officially by the employees and customers, but the shares are on the books with the bank and if the second step happens, the cash proceeds from the conversion will go to the bank also. So for all intents and purposes, the shares are owned by the bank.

Now onto the numbers…. For clarity, when I talk total shares, I include the shares held by the bank. When I talk Shares outstanding, I refer to the shares that came public in the first step and are the only ones available (and essentially only shares not owned by the bank)…

Net Interest Income (my best put at revenue for a bank)…


Yr 	Q1	Q2	Q3	Q4	 Total
’16	96.4	97.1	97.0	97.9	388.4
’17 	98.2	101.1	103.7	106.0	409.0
’18	107.2

Adjusted Earnings (based on total shares, as reported)
Yr 	Q1	Q2	Q3	Q4	Total
’14 					0.22
’15	0.05	0.06	0.08	0.06	0.25
’16	0.06	0.07	0.07	0.08	0.28
’17	0.07	0.08	0.08	0.08	0.32
’18	0.07	

Diluted Shares (total shares)
YR	Q1	Q2	Q3	Q4
’14				298.4
’15				288.5
’16	286.3	284.5	283.0	281.4	
’17	280.3	279.9	279.0	277.9	
’18	277.6

But there are 225M shares held by the bank (second step of conversion)
Which means the shares outstanding are: 

Yr	 Q1	Q2	Q3	Q4
’14				73.4
’15 				63.5
’16	61.3	59.5	58.0	56.4
’17	55.3	54.9	54.0	52.9
’18	52.6

And finally real earnings on shares outstanding…
Yr	Q1	Q2	Q3	Q4	Total
’14					0.89
’15					1.14
’16	0.28	0.33	0.34	0.39	1.34
’17	0.35	0.41	0.41	0.42	1.59
’18	0.37

  • So that puts the PE at 9.3x TTM
  • Earnings growth is about 20% per year for the last two years when accounting for share repurchases.
  • Dividends are $0.68/ share, which is about 4.5% and since they only pay that on the outstanding shares, it is less than ½ of earnings and plans to increase.
  • True book value (based on outstanding shares) is over $30/ share. So every time they buy back a share at $15, they are gaining another $15 in book value… A virtuous circle…
  • Finally, with all that, they are still overcapitalized, have bought almost 1/3 of the shares outstanding in the last 3+ years and continue to buy back more shares. They have also started bumping the dividend as well. I expect another good bump this summer.

So that is about it. I think this stock is very undervalued and as long as they keep buying back stock and raising the dividend I am very comfortable owning it (and may own the whole company by myself in another 10 years, ha ha). The only part that is hard to understand is that the price does not seem to budge but that seems to be due to the confusing aspects of a mutual conversion and quiet little S&L.

In any event, the upside is very good and the downside is very limited….

Hope this was at least interesting to you all and certainly is an investment that would be a nice diversification from most of the stocks discussed here…

Randy
Long TFSL

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Randy
I belonged to a stock service until recently by a guy who was very high on this stock. It really does not move. But, I understand the dividend and value appeal. Do you happen to know where to find total return on the stock over past 5 years/10 years? Something like that?

Thanks

Not sure where Randy found out about TFSL, but I discovered it several years ago through the now discontinued Special Opps TMF service, run by Jim Royal. For those that are interested in these kinds of opportunities via demutualizations, spin-offs, etc., Jim still has a board that is now free on the public side I believe:

http://discussion.fool.com/jim-royal-119866.aspx?mid=33033830

Jim regularly updates old recs and provides new ideas as well. These are definitely not Saul type stocks but for me ideas like TFSL and others add more conservative ballast to offset some of the great high flyers discussed on this board. Unfortunately I don’t have the time and the skills to follow Saul’s stock carefully enough to devote more of my portfolio to these companies and sleep better at night with some conservative high dividend payers.

David

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I appreciate this post, thank you for taking the time to putting it together.

I have been in and out of TFSL a few times. I held it for years, get tired of waiting and then sell for something I think has more potential, start looking for something more stable, by it again…repeat.

I have found it hard to hold any meaningful position since it only pays the 4.5% and there are many other things appreciating so much faster.

At the same time, I also find it irresistible because it seems like there is nothing preventing it from rising to a reasonable valuation. Since it something that is off the beaten path nobody knows about if it does make a meaningful move and I miss it, I will kick myself for not being patient and redeeming myself for having lost money on Indymac bank. (One of my first investments beyond mutual funds and one of the first dominoes in the financial crisis.)

Just wondering what a catalyst could be at this point? It’s small, gets no press. The story has been out there a long time, they have always said what they were going to do and executed it. (like not completing the second step “in this generation”) They don’t seem interested in acquiring and the only way they have used all that raised capital is to buy back the shares they issued. If they continue to do that, but never grow the business what’s the point? If the only way to move EPS is share buyback, why did they need the capital?

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Torguepeak,

As I recall from Jim’s posts and studying it in the past, the CFO said he is in no hurry to finish mutualization and something to the effect that it would be up to the next generation to complete the second step. Here are some links from Jim on TFSL from the past.

http://discussion.fool.com/hey-4wheel-no-worries-i39m-always-hap…

http://discussion.fool.com/yes-not-a-bad-quarter-though-some-thi…

http://discussion.fool.com/hi-dima-i-think-it39s-a-pretty-good-s…

http://discussion.fool.com/tfsl-reports-record-earnings-but-3288…

Hope these help. As Randy mentioned this is not a Saul type stock but does have some very stable qualities.

David

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Randy,

Great post on value proposition. I read and understood this well and have bought & sold TFSL for a few years now. Last position bought and sold in 2015 at a $2 profit. Latest position was about one year old. Sold all at a ~$2 loss this time. I guess I didn’t learn.

Sold partial TFSL position at beginning of March to buy CTRE (2nd time around) and add to SKT…filling out my REIT wants / needs and cost averaging REIT positions.

Sold my final portion of TFSL early last week. I recall a Kinks song: “Tired of Waiting.”

ANET, PSTG, SHOP and even GOOG are too compelling to waste more time waiting for these guys. Management is perfectly happy keeping control and not interested in taking the next demutualization step. I don’t know how taking the next step threatens them - outsider board members?? By their actions they are not holder friendly. Nothing wrong with TFSL but MUCH better places for my money.

I believe Saul held for a short time also and dropped TFSL for the same reason: other compelling investments.

Joe

Disclosure - sorry I forgot…

I own all the stocks mentioned (and wrote a May $20P on PSTG) and am Community ticker guide for ANET on Fool premium services.

Joe

Fellow Fools,
I, too, got tired of waiting and was convinced to sell when the CEO basically said he is happy standing pat as a mutual company and will let his heirs do the job of demutualization. Should the stock fall back near $10-11, I will grab a bite to ride up to 15. It did break 20 at one time, so there could be upside from here, but see the first sentence.

Vince

Jam,
Those are two similar stocks - TFSL and ANET!!! You must have a split personality!, lol.
Vince

Hi Joe,
No complaints and I understand. For me, comparing TFSL to ANET or ShOP is not a fair comparison. I get that some on this board may not understand that comment, as it seems the prevailing thought here is to finding the fastest growing, highest potential stock period. I agree in general this is true but I really believe in diversification, and this is a very undervalued and safe stock that is paying a good dividend that will be growing. And the stock is clearly growing in value even if the market is not paying up for it.

I do differ on one point though. I don’t agree that management is not shareholder friendly. If they did a second step today at a price near (probably slightly below the going rate), they would be actually giving the stock away.

To me this is a question of whether you trust in true value or the market. This is a company that is making $1.59 in earnings per year and growing. Paying $0.68 in dividends and growing. They are also buying back $30 shares for $15 with excess cash. If they take the $0.90/ share in earnings not used for dividends(6% of share price) and by back shares worth twice what you pay (12% in value) you get a 16.5% value return. That eventually has to show up, either in price or a significant long term increase in dividends. If the dividend doubles every 4 years (17% / year) it will be 18% in 8 years. Actually sounds okay to me… perhaps the best plan is for the stock to never go up, but as I said earlier. I may own most of the company by then…

Randy
Long TFSL

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split personality

Haha Vince, sometimes I think so.

Probably why my current reading is Valuegrowth Investing, How to become a disciplined Investor. G. Arnold 2002.

My bold for emphasis.

Joe

In any event, the upside is very good and the downside is very limited….

On the upside there is no catalyst. For investors, there is 4.5% yield and that’s about it. Also, separately, have you looked at their deposit base vs loan book?

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Kingran,
Probably enough on this stock for Saul’s board since it isn’t really the right company.

I agree on the lack of a catalyst. That was really the entire point of the post you quoted. My questioning was really about buying a company instead of buying a stock looking for a catalyst. But as i said in the very first line. I get it, so no disagreements…

On the loan vs book. I have looked and I think they do have a short term balances with longer term loans but I think they are okay as long as rates don’t go up quickly. A slow rise will treat them just fine which is what i think is coming…

Anyway, this was just my put to share an idea with the board. No reason to buy or disagree if you don’t like it.

A pretty good last couple of days for the high growth stocks loved here. Certainly good by me.

Randy
Long TFSL

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