Brothers analyst Michael L. Mayo said directors are likely to approve either a 15% dividend hike or a 5% share buyback program at a meeting today. Reiterating his "buy" rating on the Jacksonville, Fla., bank, Mr. Mayo said Barnett's stock is cheap, considering the value of all of the company's constituent businesses. The disparity makes Barnett a takeover candidate and pressures management to take action to enhance value, said Mr. Mayo. "I think this is the opportunity," he said of the board meeting. Barnett shares jumped to $48.75 in heavy early trading. The stock closed at $47.875, up 87.5 cents for the day. Mr. Mayo pointed out that Barnett has not increased its dividend since May 1994. He predicted that the dividend would be raised to $1.88 from $1.64, assuming a payout ratio of 35% based on projected earnings for the 12 months ended March 31, 1996. "The reasons Barnett could choose to buy back stock include an improved capital generation rate," he wrote in his advisory to investors. "Also, Barnett previously indicated it would use securities to fund loan growth and sell more of its residential loan production. These actions, while slowing earning asset growth, could give Barnett the capital it needs to buy back stock." Mr. Mayo uses a calculation of Barnett's true franchise value in supporting his view that the banking company's shares are cheap. Adjusting Barnett's book value of $32.29 per share for off-balance-sheet items such as credit card and mortgage servicing rights, excess reserves, and core deposits, Mr. Mayo sets the franchise value at $62 per share. He said Barnett's off-balance-sheet adjustment amounts to 96% of book value. That is well above an industry average of about 75%, he said. What spells opportunity is that a discrepancy is also reflected in the trading value of Barnett stock, which stood at $47, or 76% of franchise value, when Mr. Mayo issued his report. By contrast, peers trade at an average of 92% of franchise value, the analyst said. Other firms have taken a more skeptical view of Barnett. Salomon Brothers Inc., for instance, has had a "hold" rating on the stock for some time. Analyst Carole Berger said she expects the issue to perform in line with the market. Mr. Mayo said took issue with "a misguided perception that management will not use its capital effectively," saying management is "well in tune" with that objective. "The other point I've made is that Barnett benefits more than the average" from an 83% reduction in deposit insurance costs that could take effect later this year, the analyst said in an interview. Barnett's stock performance has been above average so far this year, said Mr. Mayo, who estimated the issue's trading value could rise to the high 50s in the next 12 months.
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