Bank of Ireland (LSE:BIRG, Financial) – During the last three years, the share price of Bank of Ireland has fallen slightly more than 70%, a substantial portion of which occurred pre-COVID. That has occurred, primarily as a result of its earnings multiple having shrunk from roughly 10x to 5x. In the face of historically low interest rates, bank incomes have been challenged, which has resulted in its earnings per share having shrunk from EUR 0.59 in 2017 to EUR 0.36 in 2019. Today, with the share price at EUR 1.86, the multiple on 2019’s depressed earnings is 5.16x. Another way to think about that multiple is that as an owner of the business I would be realizing an earnings yield of roughly 20% on today’s price. That is roughly triple the 7% long-term historical return of equities broadly. Over the last five years, in a very depressed interest rate environment, Bank of Ireland has produced average earnings of EUR 0.59 per share. Today’s share price is a mere 3.1x multiple of that number. While we are aware that interest rates are forecast to stay at rock bottom levels for some time, we seem more in touch than many with the historical tendency for inflation and interest rates to surprise relative to expectations. Furthermore, the fact that interest rates are at or near historical records in Europe and elsewhere weighs heavily in our suspicion that probabilities of an upward move in rates are higher than a downward move. Any movement towards more normalized interest rates would be an incredibly powerful boost to Bank of Ireland’s income statement. That said, in early 2020 the company had declared a dividend reflective of its depressed 2019 income, though the dividends for all European banks were subsequently suspended. Were that dividend to have been paid, which it may well be in the future, it would represent a 10% annual dividend yield. It used to be that an investor would need to take on considerable credit risk in exchange for this type of return but that just isn’t the case for Bank of Ireland or a number of other opportunities today, which is what makes this moment in time so unusually attractive. In fact, coming into the COVID crisis, Euro area banks had rarely, if ever, been better capitalized and Bank of Ireland is no exception.
From the Third Avenue Value Fund (Trades, Portfolio)'s second-quarter 2020 commentary.
