SunTrust's Stock 'Disconnected From Strong Fundamentals,' Argus Says

Shares of SunTrust Banks, Inc. STI have underperformed its regional bank peers over the past six months, but the recent stress test report makes it clear the stock is "disconnected from strong fundamentals," according to Argus.

The Analyst

Argus Research Company's Stephen Biggar upgraded SunTrust Banks from Hold to Buy with a new $75 price target.

The Thesis

SunTrust's main takeaway from the recent Federal Reserve stress test includes a better than expected capital return program, Biggar said in a note. Specifically, the company lifted its share buyback plan authorization by 52 percent to $2 billion. This should now lower the total share count by 4 percent, which is better than prior expectations of a 3 percent reduction.

The company also lifted its quarterly dividend by 25 percent to 50 cents a share, which would improve the dividend yield on the stock from 2.4 percent to 3 percent.

Meanwhile, SunTrust's stock is trading at 12.5 times Argus' estimated 2018 EPS, which is below the industry average. The stock typically trades at a premium to its regional bank peers and this disconnect should reverse as investors appreciate the improved capital return plans. The firm's $75 price target implies the stock trades at 14 times 2018 estimated EPS.

Price Action

Shares of SunTrust Banks were trading around $66.66 at time of publication.

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