It seems a wise idea to add State Street (STT Quick QuoteSTT - Free Report) stock to your portfolio now. The company’s solid business servicing wins, strategic acquisitions, global reach and efforts to technologically upgrade operations are expected to aid revenues. Its steady capital distribution activities will likely continue enhancing shareholder value.

Analysts seem optimistic regarding the company’s earnings growth prospects. Over the past 30 days, the Zacks Consensus Estimate for earnings has been revised 1% and marginally upward for 2024 and 2025, respectively. The stock currently carries a Zacks Rank #2 (Buy).

Over the past six months, shares of STT have jumped 5.9%, underperforming the industry’s rally of 25.3%.
 

Image Source: Zacks Investment Research

Here are a few factors that make State Street stock a solid investment option now.

Revenue Strength: While the company’s net interest revenues (NIR) declined over the past couple of years because of near-zero interest rates, the metric witnessed a three-year (ended 2023) compound annual growth rate (CAGR) of 7.8%. Though rising funding costs and shrinking non-interest-bearing deposit balance are expected to weigh on both NIR, high interest rates for a longer period are likely to offer some support. Though we project NIR will decline 10.2% and 5.7% in 2024 and 2025, respectively, the metric will rebound and grow 2% in 2026.

Likewise, while the company’s total fee revenues declined in 2022, the same saw a four-year (2019-2023) CAGR of 1%. The company is well-positioned with respect to fundamental business activities, given its global exposure and a broad array of innovative products and services (including the launch of State Street Digital and State Street Alpha). These efforts, along with business servicing wins and inorganic growth strategy, are expected to keep supporting fee income. We anticipate total fee revenues to witness a CAGR of 3.6% by 2026.

Our projections for total revenues suggest year-over-year growth of 2.4%, 2.9% and 3.3% for 2024, 2025 and 2026, respectively, and ensure the continuation of the upward trend.

Earnings Growth: State Street recorded earnings growth of 4.6% over the last three to five years. Though we expect earnings to decline marginally this year, the metric will rebound and grow at the rate of 11% and 18.7% for 2025 and 2026, respectively.

Also, the company’s long-term (three to five years) estimated EPS growth rate of 7.7% promises rewards for investors.

Further, State Street has a Growth Score of B. Our research suggests that stocks with a Style Score of A or B, when combined with Zacks Rank #1 (Strong Buy) or 2, offer the highest upside potential.

Business Restructuring Efforts: State Street has been expanding its scale inorganically and through business consolidation. In February, the company announced the completion of its acquisition of CF Global Trading, which will further expand outsourced trading capabilities. Last year, the company announced consolidation of its operations in India. The company will assume full ownership of its joint venture (JV) with HCLTech, having already assumed the full ownership of another Indian JV, the Atos Group, in the third quarter of 2023. These are part of the company’s ongoing initiatives to optimize its global operations.

Impressive Capital Distributions: State Street’s capital distribution plan is solid. Following the clearance of the 2023 stress test, the company announced a 10% increase in quarterly dividend to 69 cents per share. This was the third consecutive annual hike in dividend payout by 10%.

The company reiterated its intention to continue its share repurchase program. Hence, this January, it authorized to buy back shares worth up to $5 billion (with no expiration date), effective the first quarter of 2024. Driven by a strong capital position and earnings strength, STT is expected to sustain improved capital distributions in the future.

Strong Leverage: State Street’s debt/equity ratio is 0.86 compared with the industry average of 1.05. This indicates that STT has a relatively lower debt burden compared with peers. Thus, the company will be more financially stable in adverse economic conditions.

Further, as of Dec 31, 2023, the company had a total debt worth $23.3 billion, while cash and dues from banks and interest-bearing deposits with banks were $91.7 billion. STT also maintains investment-grade ratings of A1/A/AA- on senior debt from Moody’s Investors Service, Standard and Poor’s and Fitch Ratings, respectively.

Stock Seems Undervalued: The State Street stock seems undervalued right now when compared with the broader industry. The company’s price/book ratio of 1.04 is lower than the industry average of 1.09. Also, its price-earnings (P/E) (F1) ratio is 9.76, which is below the industry average of 10.60.

Further, State Street has a Value Score of B.

Other Stocks Worth a Look

A couple of other top-ranked major bank stocks are The Bank of New York Mellon Corporation (BK Quick QuoteBK - Free Report) and Northern Trust Corporation (NTRS Quick QuoteNTRS - Free Report) .

The Zacks Consensus Estimate for BK’s current-year earnings has increased 1.6% over the past 30 days. The company’s shares have rallied 16.8% over the past three months. BK currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

NTRS also sports a Zacks Rank of 1 at present. The company’s 2024 earnings estimates have been revised 1.3% north over the past month. Over the past three months, the company’s shares have gained 4.8%.