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Monthly Dividend Stock In Focus: Itaú Unibanco


Updated on September 10th, 2024 by Felix Martinez

Banks in the US are generally well regarded when it comes to income investing. They tend to pay decent yields, and the best-run banks offer relative dividend security, as well as the potential for dividend growth. Internationally, banks have proven riskier due to a variety of factors, including geopolitical risk, localized economic weakness, currency risk, and others.

Itaú Unibanco (ITUB) is a Brazilian bank that pays a relatively small dividend to shareholders but one that is quite secure. In addition, it pays its dividend monthly instead of quarterly, allowing for faster wealth compounding and current income.

Itaú Unibanco is one of the stocks we cover that makes monthly dividend payments. You can download our full list of 78 monthly dividend stocks (along with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the link below:

 

Click here to instantly download your free spreadsheet of all 78 monthly dividend stocks now, along with important investing metrics.

Despite the payout ratio being extremely low, and therefore implying high levels of dividend safety, we see many growth challenges ahead for Itaú Unibanco. With the earnings outlook quite murky, and Brazil’s economic growth in doubt, we have concerns about the bank’s near-term future.

Given this, we are cautious on Itaú Unibanco’s prospects as an investment at this time, despite its attractive monthly payout schedule.

Business Overview

Itaú Unibanco is a very large bank that is headquartered in Brazil. ITUB is a large cap stock with a market capitalization above $61 billion.

Itaú Unibanco conducts business in more than a dozen countries around the world, but the core of its business is in Brazil. It has significant operations in other Latin American countries and select businesses in Europe and the US.

Its scale is huge in relation to other Latin American banks. Itaú is the largest financial conglomerate in the Southern Hemisphere, the world’s 10th–largest bank by market value, and the largest Latin American bank by assets and market capitalization.

The bank offers its customers an impressive list of services, running the entire spectrum of financial products. This huge list of offerings has helped Itaú Unibanco grow to its current size while diversifying its revenue streams.

Its business has two main segments – Retail Banking and Wholesale Banking. Retail Banking serves smaller consumer accounts, while Wholesale Banking serves larger, mostly business accounts. The retail business produces about two-thirds of the company’s total net income, with the wholesale business making up the balance.

Both are critically important to the bank’s profit outlook, but like many other large banks, Itaú Unibanco’s business is heavily dependent upon consumers.

Given Itaú Unibanco’s reliance upon Brazil and other South American countries for its earnings, we have significant concerns about its ability to grow.

Growth Prospects

Itaú Unibanco’s strategy of trying to be everything to every consumer and business isn’t unusual in the world of banking. The major US banks have adopted a similar strategy over time, providing core banking services like deposits and loans, but also insurance products, equity investing, and a host of other products to help attract customers.

However, what sets Itaú Unibanco apart is its exposure to emerging economies rather than established ones in Europe or the US.

Indeed, Brazil’s economy has struggled for many years, and many of the other countries Itaú Unibanco operates in similar, if not worse, situations.

This is a primary concern for us regarding the company’s ability to grow because the business model of a bank requires broad economic growth for its own expansion. Without this growth, Itaú Unibanco will have a difficult time producing profit expansion.

On August 5th, 2024, Itaú Unibanco reported second-quarter results for 2024. In the second quarter of 2024, the recurring managerial result reached $1.8 billion, reflecting a 3.1% increase from the previous quarter. The consolidated recurring managerial return on equity was 22.4%, with Brazil’s operations showing a slightly higher rate of 23.6%. The consolidated loan portfolio grew by 5.9%, with a 4.3% increase in Brazil. When excluding exchange rate variations, the consolidated loan portfolio rose by 2.7% for the quarter and 7.1% year-on-year. Notably, the individuals’ loan portfolio in Brazil increased by 1.2% for the quarter and 3.2% year-on-year, despite challenges in the credit card segment due to risk management adjustments. The second quarter also saw significant growth in certain loan portfolios.

The Uniclass and Personnalité segments experienced a 3% quarterly growth, contributing to a 17% increase year-on-year. Mortgage portfolios grew by 1.6%, while payroll loans increased by 0.8%. Large companies’ loan portfolios saw an 8.6% surge, driven by higher demand for credit. These expansions positively impacted the margin with clients, which grew by 1.7%, closing at $4.7 billion. Credit quality metrics remained stable, with non-performing loans over 90 days at 2.7%. Additionally, the ratio of non-performing loans between 15-90 days improved slightly, dropping by 0.1 percentage points to 2.3%.

On a year-on-year basis, the first half of 2024 showed a 15.5% increase in recurring managerial results and a 1.2 percentage point rise in recurring managerial return on equity. Income before taxes and minority interests rose by 21.7%, totaling $5.3 billion. The growth in the loan portfolio, along with higher revenues from structured operations and increased financial margins, contributed to a 6.3% rise in the financial margin with clients. Commissions, fees, and insurance operations also saw an 8.1% increase year-on-year, driven by higher revenues from investment banking, asset management, and card issuer activities. Despite a 5.0% rise in non-interest expenses, the efficiency ratio improved by 1.1 percentage points

 

Source: Investor Presentation

Dividend Analysis

Itaú Unibanco has a conservative approach to paying its dividend. The bank pays out dividends to shareholders based on its projected earnings and losses, with the goal being the ability to continue to pay the dividend under various economic conditions.

Thus, Itaú Unibanco isn’t a pure income stock by any means, as its yield is too small to be attractive to most income investors.

On the plus side, the very yield affords the bank better dividend coverage as the payout ratio is in the teens. We, therefore, do not see any risk of a negative change in the dividend policy today, but we are also cautious about future growth given the uncertain outlook for Brazil’s economy.


Source: Investor Presentation

Thus, we do not believe income investors should be interested in Itaú Unibanco stock, due to its fairly low yield and the number of elevated geopolitical and macroeconomic risk factors.

Final Thoughts

We see a difficult road ahead for Itaú Unibanco. With low projected earnings growth under normalized conditions and a diminutive dividend yield, we don’t view this stock as attractive.

Furthermore, buying international stocks carries multiple unique risk factors, including geopolitical and currency risks. Itaú stock provides geographic diversification for investors particularly interested in investing outside the United States.

However, the risks seem to outweigh the potential rewards for this stock. Given all of the above factors, we recommend investors avoid Itaú Unibanco, despite its monthly dividends.

Don’t miss the resources below for more monthly dividend stock investing research.

And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.

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