Bendigo and Adelaide a buy?

Getting an even break from the stranglehold the big four have on Australia’s banking is always the hope of the smaller finance market players such as Bendigo and Adelaide Bank (ASX: BEN).

There are plenty of reasons to like this stock. Sure, it’s had its ups and downs during the resources boom, its spikes with investors desperate for high-yielding stocks to better their fixed interest accounts, but Bendigo is a solid business with a clear vision.

Its strategy was made even plainer when it was reported in May that it was looking to redress the income share with its 300 franchises. The locally owned community banks currently retain about 60% of their revenue, but Bendigo has a “restoring the balance” (a nice pun) program to get it back closer to the 50-50 partnership model.

It’s that model that Bendigo pushes to set itself apart, but others have been lately emulating its community feel, notably Bank of Queensland (ASX: BOQ), which has a smaller market capitalisation at $2.8 billion, and Suncorp (ASX: SUN), which is much larger but gets only a quarter of its revenue from banking.

Investors might think that with a year-to-date share price performance increase of more than 22% and a one-year increase of almost 35% there isn’t much steam left in Bendigo’s current run-up. But its stock price has been as healthy as an intraday high of $11.38 as recently as May 3, and its chart has shown a strong upward trend towards the $10.50 mark since it hit a recent low of $9.31 on June 13.

Unless bank stocks fall suddenly out of favour — and with interest rates tipped to head even lower that’s perhaps unlikely — there is every reason to think Bendigo will be close to that recent high before the end of the year, if not surpass it. Seeing it back to its 2007 all-time high of $17.81 is a big call, but still more chance in the longer term than revisiting its post-GFC 10-year low of $5.73.

Bendigo seems fairly valued with a price earnings ratio of 10.96, lower than other banks, and it has an attractive dividend yield of 6.3%, bettered only among the banks by National Australia Bank (ASX: NAB), which is currently 6.4%.

With Morningstar setting Bendigo’s intrinsic value at $10 and it trading well under that most of the time since late May, there could be better entry points than now. But if analyst consensus that we’ll see a stronger market by year’s end is correct, investors wanting to get onboard should not leave it too late.

Foolish takeaway

A high-yielding bank play outside the big four and good growth prospects make Bendigo and Adelaide worthy of consideration in any portfolio, especially if market dips present some entry points.

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Motley Fool contributor Andrew Ballard owns shares in BEN, BOQ and NAB. 

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