Dear Mr. Berko:

Please tell me what you can about Washington Mutual Inc. I’d like to buy 25 shares for my portfolio because it pays a good dividend and because it has a good long-term earnings record.

Please tell me if you think this is a good idea for a 37-year-old working divorcee who is trying to accumulate assets for her retirement. Would this be a good short-term or long-term stock? As you can see from my portfolio I own 24 stocks, all odd lots, worth about $76,000. Am I doing the right thing?

N.R., Fort Walton Beach, Fla.

Dear N.R.:

You’ve got a swell stock portfolio and I think Washington Mutual Inc. (WM-$38.78) would make a good addition to it. WM is a superbly managed thrift. You are doing the right thing. Twenty-five different stocks are a lot to keep track of, though, so I’d consider stopping at that number and investing future money in existing positions.

Based in Seattle, WM is the largest savings institution in the country, with nearly $300 billion in assets. It has scored a numinous string of successes and might be the best-run thrift in the country.

WM makes so much money that management has problems deciding what to do with the billions of dollars it earns each year. This year, the company said it would buy back 100 million shares and raise its 2003 dividend to $1.60 a share from last year’s $1.06. In 1990, the dividend was at 8 cents. During that period, WM’s earnings rose from $65 million to $4 billion this year. That’s a sixtyfold increase.

WM, which bought Dime Bancorp Inc. of New York last year, has 2,507 branches in 42 states and expects to open 250 to 260 new branches in 2003. During the last 15 years, management has engineered 18 acquisitions that have fueled its incredible growth.

Because the company has hoards of cash, the talk is that management has its laser eyes pointed at Astoria Financial Corp. (AF-$32.08), which is trading at 12 times earnings, Staten Island Bancorp Inc. (SIB-$20.20), which trading at 10 times earnings, or GreenPoint Financial Corp. (GPT-$30.30), which trades under eight times earnings.

In recent years, WM has opened fashionable, bright and semi-cozy bank branches in New York, Chicago, Atlanta and Denver. Deposits are up more than 30 percent from last year, with 75 percent of this growth coming from non-interest-bearing checking accounts. Home loans account for 66 percent of WM’s lending portfolio.

The average home mortgage has a seven-year life. That means about 14 percent of this portfolio turns over annually, creating new fee business each year. Loans on multifamily housing account for about 12 percent of the portfolio, while home equity loans and other lines of credit make up 14 percent. Specialty mortgage loans and other business round out the portfolio.

WM has a strong balance sheet. Its net profit margins have increased more than 50 percent in the past decade, from 14.4 percent to 22 percent, and the company is effectively managing its interest rate risks.

Wall Street expects the high current refinancing rate to continue into the third quarter despite the spike of long-term bond rates in July. There’s a good possibility that net interest rate margins will narrow from last year’s high levels and that WM may see a small decline in net interest income for 2003. This should be mitigated by a decline in loan-loss provisions of some 18 percent to 20 percent.

WM’s branch expansion program, which may increase operating costs by 12 to 14 percent, should be mitigated by the company’s huge share repurchase program. Wall Street analysts predict its earnings will come in between $4.40 to $4.45 per share this year, which translates to a price-earnings ratio of less than nine times this year’s earnings.

Those analysts also believe that lower mortgage banking fees during 2004 may limit 2004 earnings to the $4.65-$4.70 level. That’s not bad.   In the past five years, WM traded at an average of 10.5 times earnings. Using that as a yardstick, the company’s share price could jump to $49 in the next 12 months. That means that in the short-term, there may be a 10-point upside to the stock, plus a good dividend. For the long term, I think WM is a keeper.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.