An analysis of publicly-traded U.S. bank holding companies by TheStreet highlights six bank stocks with attractive dividend yields and strong prospects for growth.
A stable dividend exceeding 4 per cent is quite compelling considering how low interest rates are. Based on first quarter regulatory data and market data from Friday's close provided by SNL Financial, we narrowed down the list using the following criteria:
- Bank and thrift holding companies publicly-traded in the U.S., excluding the PinkSheets.
- Dividend yield greater than 4 per cent as of Friday's close.
- Price-to-tangible-book ratio below 2.
- Three-month average trading volume over 25,000 shares.
- Texas ratio below 20 per cent.
The Texas ratio is a bank's ratio of nonperforming loans and securities to core capital and loan loss reserves, and was among the key ratios investors and regulators focused on as the real estate bubble burst. A Texas ratio of 40 per cent is typically considered a threatening level, depending of course on a bank's overall level of capital and reserves. Keeping our picks below a 20 per cent Texas ratio is pretty conservative.
Limiting the group to bank stocks selling for less than two times tangible book value is also conservative, limiting downside risk over the short term. Most of these bank and thrift holding company stocks sold at higher levels relative to book value at the end of 2007 and 2006, before the crisis hit.
This approach also excludes some compelling bank plays with high dividends, such as New York Community Bank, with shares yielding 6.25 per cent but selling for 2.4 times tangible book, after rising 14 per cent year-to-date.
Hudson City Bancorp
Shares of Hudson City Bancorp closed at $13.01 (U.S.) on Friday and yielded 4.61 per cent, based on a quarterly payout of 15 cents a share. Hudson City of Paramus, N.J. is the largest bank or thrift holding company among our dividend picks, with $61-billion in total assets. It is also a very conservative choice, with improving earnings and minimal loan losses through the real estate crisis.
Main subsidiary Hudson City Savings Bank is one of the most efficient banks or thrifts in the entire industry, with an efficiency ratio of just 21.18, compared to a national aggregate of 55.53 for all U.S. banks and thrifts, according to the Federal Deposit Insurance Corporation.
The efficiency ratio is, roughly, the number of pennies of expense for every dollar of revenue earned. Hudson City's amazing efficiency is what enables the thrift to post decent earnings despite a narrow net interest margin of 2.21 per cent for 2009, compared to 3.47 per cent for the industry.
The margin is the difference between a bank or thrift's average yield on earning assets and its average cost of funds. With the company having already applied with regulators to convert its main subsidiary from a thrift to a commercial bank, Hudson City will have an opportunity to continue improving its spread by diversifying its lending activity.
This quality stock is downright cheap, selling at just 1.2 times tangible book value. Shares are going for 10.8 times current earnings, and a low 9.6 times the earnings for 2012 projected by analysts polled by Thomson Financial. A good indicator of just how much upside potential the shares have over the long haul is that Hudson City's P/E at the end of 2008 was 16, well below its range from 23.3 to 26.7 at the end of the previous three years. And you get paid so nicely as you wait.
Peoples United closed at $14.55 on Friday and, based on a quarter dividend of 15.5 cents, shares were yielding 4.26 per cent. Peoples United has been a volatile stock over the past year, and one reason the dividend yield is so attractive is that shares have dropped 11 per cent year-to-date, through Friday. The Bridgeport, Conn. thrift holding company's results remained positive but mediocre through the crisis, with a return on average assets ranging from 0.26 per cent to 0.51 per cent, while a reasonable target would be 1 per cent. Earnings were weak in the first quarter of 2010 because of merger and systems conversion expenses.
The company's dividend appears safe though because the bank has weathered the crisis well and has a very high level of capital, with a total risk-based capital ratio of 21.24 per cent as of March 31 -- more than twice the level needed for it to be considered well capitalized by regulators.
Peoples United's management has repeatedly said it would look to leverage the capital and expand through acquisitions. True to its word, the company made a small purchase recently, scooping up the failed Butler Bank of Lowell, Mass.
Shares are selling for 1.4 times tangible book value, which is less than the valuation at the end of the past two years. The price-to-earnings ratios based on current and projected earnings are very high, underlining the fact that Peoples United is a long-term play on management's ability to effectively expand by leveraging its excess capital.
First Niagara Financial
First Niagara Financial of Lockport, N.Y. is emerging as a big winner from financial crisis, having expanded throughout Pennsylvania and more than doubling its asset size over the past year to $20-billion, with the April 9 acquisition of Harleysville National Corp. and the purchase of 57 National City Bank branches from PNC Financial Services in September. Shares closed at $13.39 Friday, yielding 4.18 per cent on a quarterly payout of 14 cents. Earnings and asset quality have held up well through the crisis, although nonperforming loan levels will increase a bit when second quarter numbers are available, because of the Harleysville acquisition.
Shares are selling at 1.7 times tangible book value as of Friday's close, and as you can see in the chart, tend to trade much higher during "normal" times. The price-to-earnings ratio is 17.2, but the P/E drops to 11 based on 2012 projected earnings, indicating plenty of upside for First Niagara.
Dime Community Bancshares
Dime Community Bancshares is headquartered in Brooklyn, N.Y. Shares closed at $13.81 on Friday and yielded 4.06 per cent on a quarterly payout of 14 cents. Dime Community is a compelling franchise that posts stable earnings with minimal loan losses through thick and thin, and the yield has dropped sharply with shares returning 20 per cent year-to-date.
Despite the recent run-up in the shares, Dime Community is trading at historically low valuations. Shares are trading at 1.9 times tangible book value, which shows some upside based on historical valuations, but a look at the company's P/E ratio is even more compelling. The ratio is now at 12.5 and it dips below 10 based on the consensus earnings estimate for 2012. In 2006, 2007 and 2008, the P/E hovered around 20, so the stock is showing quite a bit of upside potential in a stable economy.
Bank of Commerce Holdings
Bank of Commerce Holdings of Redding, Calif. is the smallest holding company of our six picks, with $831-million in total assets as of March 31. It is also the only one of the picks to still owe money to the Treasury for bailout funds provided via the Troubled Asset Relief Program, or TARP.
The good news is that after raising $30.6-million through a secondary offering of common shares in March, the company could easily repay the $17-million in TARP money and remain strongly capitalized. The company raised an additional $2.8-million common equity in April, through an over-allotment on the March offering.
While the secondary offering was dilutive for shareholders, new investors are now looking at a strongly capitalized company that can easily support its dividend and can make strategic acquisitions as more banks fail. Bank of Commerce Holdings also boasted an excellent net interest margin of 4.12 per cent for the first quarter, improving from 3.55 per cent a year earlier.
Shares closed at $4.91 Friday and were yielding 4.89 per cent on a quarterly payout of 6 cents a share. The stock is trading right at tangible book value, making a compelling case for the company, since it is profitable. Price-to-earnings is just 8.1. While Bank of Commerce Holdings has not been a compelling performer of late, the company is coming through the crisis in a strong capital position and is clearly undervalued.
Washington Trust Bancorp
The last of our six bank dividend picks is Washington Trust Bancorp of Westerly, R.I. Shares closed at $19.56 Friday and yielded 4.29 per cent on a quarterly payout of 21 cents. The stock is up more than 20 per cent year-to-date, so the word is already out to some degree. Washington Trust has posted mediocre earnings through the crisis, but profits are on the upswing of late, with the bank turning in an ROA of 0.72 per cent for the first quarter. Loan losses have been minimal through the crisis, and the company is easily supporting its dividend.
Shares were trading for 1.6 times tangible book value, which is way below the level in 2006 and 2007. The price-to-earnings ratio was a bit high at 15.2 as of Friday, but drops to 12.9 based on projected earnings for 2011.