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Washington Mutual Inc. $44 – New York symbol WM

WASHINGTON MUTUAL INC. $44 (New York symbol WM; WSSF Rating: Average) is the nation’s largest thrift company, with over 2,500 branches and offices. Residential mortgages account for over 60% of its total loan portfolio. Other operations include corporate lending and insurance.

Rising interest rates has slowed demand for new mortgages, and refinancing of existing ones. That forced Washington Mutual to cut costs, and reduce its exposure to the mortgage industry. Consequently, the company acquired credit card issuer Providian Financial Corp. for $6.1 billion in cash and stock.

This is a big commitment for Washington Mutual, which earned $0.92 a share (total $821 million) in the third quarter of 2005, up 21.1% from $0.76 a share ($674 million) a year earlier. (These figures do not include Providian.) It will take several months for Washington Mutual to absorb its new operations. But they should eventually add around $0.10 a share to its annual earnings.

The company’s focus on residential mortgages keeps its loan losses low. Bad loans fell to just 0.52% of total assets at September 30, 2005 from 0.61% a year earlier. However, credit cards loans are riskier than mortgages, so the Providian acquisition could push up Washington Mutual’s loan losses in the next few months.

The stock has stayed in a narrow range for the past two years, and now trades at 11.7 times the $3.75 a share it will probably earn in 2005. The $1.96 dividend yields 4.5%.

Washington Mutual is a buy.

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