Updated with commentary on banking industry trends for dividend increases from KBW.
NEW YORK (
) -- Common stocks of banks are becoming increasingly attractive for income-seeking investors and now is the time to see what fits best for your portfolio.
New preferred stock issues have seen rates significantly decline this year and, of course, the Federal Reserve's most recent
moves aren't helping matters, as the central bank continues doing everything it can to keep long-term rates low.
This, or course, is no help for income-seeking investors, however, the growing evidence of a housing recovery is good news for bank stocks, many of which are still trading below their typical valuations to book value and forward earnings estimates, and with quality names easily covering generous dividend payouts, there are some solid growth and income plays out there.
KBW on Thursday published some statistics showing a power trend for dividend increases in the banking industry. According to KBW analyst Melissa Roberts, "44 banks increased, initiated or reinstated their quarterly cash dividend" during the third quarter, and of that total, 25 had received government bailout assistance through the Troubled Assets Relief Program, or TARP, "that fully repaid their TARP investment."
Meanwhile, only two two banks cut their dividends during the third quarter, while two skipped a dividend, and one publicly traded bank --
United Community Bancorp
of Lawrenceburg, Ind. -- discontinued paying a dividend.
Roberts added that "Since 2011, 147 banks engaged in 264 dividend increases (inclusive of initiations and reinstatements)."
Beginning with bank and thrift stocks rated a "Buy" from
, we then used data provided by Thomson Reuters Bank Insight to narrow the list down to the actively traded names -- with average daily trading volume of over 40,000 shares -- that have the highest dividend yields, while also paying out less than 60% of their earnings over the past 12 months through June 30.
takes a very conservative, long-term approach to stock ratings, placing its emphasis on long-term total returns as well as revenue trends and capital strength and dividends. The ratings also consider short-term performance, financial stability and volatility.
When we took a
to identifying bank stocks with safe and attractive dividend yields back in early June,
made the cut, because the stock had tanked in the wake of CEO James Dimon's initial announcement of the hedge trading losses resulting from the activity of the "London Whale."
Following Dimon's announcement in May, JPMorgan announced it was suspending its common share buybacks, but planned to maintain its dividend. When JPMorgan's stock closed at $31.00 on June 4, the shares had a dividend yield of 3.87%, based on a quarterly payout of 30 cents.
Since then, JPMorgan posted a
of $5 billion, despite booking $4.4 billion in hedge trading losses. The shares have recovered 32%, closing Tuesday at $40.92, with the dividend yield declining to a still-attractive 2.93%, which among the 24 components of the
KBW Bank Index
is only exceeded by
Peoples United Financial
( NYB) and
New York Community Bancorp
Peoples United of Bridgeport, Conn., closed at $12.12 Tuesday, down 2% year-to-date, following a 4% decline during 2011. Based on a quarterly payout of 16 cents, the shares have a dividend yield of 5.24%. For the 12 month-month period ended June 30, the company's dividend payout ratio was 84.
With excess capital -- the company's tangible common equity ratio was 11.47% as of June 30 -- People's United has been aggressively buying back shares, while maintaining the high dividend payout. The shares trade for 1.4 times tangible book value, and for 15 times the consensus 2013 EPS estimate of 83 cents, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 74 cents.
New York Community Bancorp
( NYB) of Westbury has an even higher dividend yield of 6.96%, based on Tuesday's closing price of $14.36, and a quarterly payout of 25 cents.
For the 12-month period ended June 30, New York Community Bancorp performed well, with an operating return on average assets (ROA) of 1.16% and a return on average tangible common equity (ROE) of 15.77%, according to Thomson Reuters Bank Insight. On the other hand, the company paid dividends of just under 90% of its earnings during that period.
Over the past several years, some analysts have questioned the company's ability to continue paying a dividend at this level, while others have continued to express confidence that New York Community will be able to maintain the dividend, while building capital. The company has maintained the 12-cent quarterly dividend for 34 consecutive quarters.
Here are the five buy-rated bank dividend stocks, in order of ascending dividend yield:
5. NBT Bancorp
of Norwich, N.Y., closed at $22.06 Tuesday, returning 3% year-to-date, following a 5% decline during 2011. Based on quarterly payout of 20 cents, the shares have a dividend yield of 3.63%.
The shares trade for 1.9 times tangible book value, according to Thomson Reuters Bank Insight, and for 13 times the consensus 2013 EPS estimate of $1.65 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $1.60.
For the 12-month period ended June 30, NBT's operating return on average assets (ROA) was 0.97%, and its return on average tangible common equity (ROE) was 14.02%, according to Thomson Reuters Bank Insight. During that period, the company's dividend payout ratio was 59.20%.
Guggenheim Securities analyst David Darst has a neutral rating on NBT Bancorp, with a $21 price target, and said in July after the company reported its second-quarter results that "organic loan growth accelerated in 2Q12 to over 7% given stronger demand in Utica, the Capital Region, and Vermont. We now expect total loan growth of 12% with 6% organic growth in 2012, which reflects a nice acceleration."
Darst estimates that NBT will report third-quarter earnings of 40 cents a share, matching the company's results during the second quarter, but down from 45 cents during the third quarter of 2011.
NBT's net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to 3.82%, from 3.90% the previous quarter, and 4.13% a year earlier, in line with the banking industry's aggregate performance, as the Federal Reserve's target short-term rate has remained in a range of zero to 0.25% since late 2008, while long-term rates have continued to decline.
Darst said "we believe revenue growth will remain a challenge in the current interest rate environment," and that he expects "a NIM of ~3.70% by year-end."
Interested in more on NBT Bancorp? See TheStreet Ratings' report card for this stock.
4. Dime Community Bancshares
Dime Community Bancshares
of Brooklyn, N.Y., has seen its stock return 20% through Tuesday's close at $14.66, following a 10% decline during 2011. Based on a quarterly payout of 14 cents, the shares have a dividend yield of 3.82%.
The shares trade for 1.6 times tangible book value, and for 12 times the consensus 2013 EPS estimate of $1.16. The consensus 2012 EPS estimate is $1.24.
Dime's operating return on average assets (ROA) for the 12-month period ended June 30 was of 1,14% and its return on average tangible common equity (ROE) was 14.26%, according to Thomson Reuters Bank Insight.
For the 12-month period ended June 30, the company's dividend payout ratio was 41.55%, which was the lowest among the five stocks among in our selected list.
The consensus among analysts is for Dime to report third-quarter earnings of 30 cents a share, declining from 34 cents a share in the second quarter, and 33 cents during the third quarter of 2011.
Sterne Agee analyst Matthew Kelley has a neutral rating on Dime Community Bancshares, and said on July 30 after the company announced its second-quarter results that based on a price of $14.75, the shares were "fairly valued at 13.6x our revised 2013 estimate" of $1.12, "with core earnings power under pressure as the net interest margin contracts."
Dime's net interest margin increased to 3.63% during the second quarter from 3.47% the previous quarter, "due to a decline of 45 basis points in the average cost of funding, that was partially offset by a decline of 28 basis points in the average yield on interest earning assets," according to the company. During the second quarter of 2011, the net interest margin was 3.66%.
Kelley said that "We believe asset yield compression will continue to outpace funding cost reductions over the next several quarters," but that "despite a difficult operating environment, we believe the company will be able to maintain a return on assets (ROA) above 0.90% through 2014 with solid expense management."
While the shares may indeed be fairly valued at their current level, a 3.82% dividend -- easily covered by earnings -- is nothing to sneeze at in the current environment. It's also important to carefully consider your investment horizon, because sell-side analysts' ratings typically have a short horizon of only 12 months. For an income play, "long-term" should mean much longer than a year.
Interested in more on Dime Community Bancshares? See TheStreet Ratings' report card for this stock.
3. City Holding Company
City Holding Company
of Charleston, W.V., closed at $36.14 Tuesday, returning 10% year-to-date, following a 2.5% decline during 2011. Based on a quarterly payout of 35 cents, the shares have a dividend yield of 3.87%.
The shares trade for 2.1 times tangible book value, and for 12 times the consensus 2013 EPS estimate of $2.95. The consensus 2012 EPS estimate is $2.70.
City Holding Company's ROA for the 12-month period ended June 30 was of 1.40% and its ROE was 15.12%.
For the 12-month period ended June 30, the company's dividend payout ratio was 53.11%.
The company on Aug. 2 agreed to acquire
( CFFC) of Staunton, Va., for $16.1 million in stock. Community Financial had $508 million in total assets, with 11 branches. The deal is expected to be completed during the first quarter of 2013 and follows City Holding Company's second-quarter acquisition of Virginia Savings Bancorp.
The consensus among analysts is for City Holding Company to report third-quarter earnings of 68 cents, increasing from 50 cents during the second quarter, when the company recorded 18 cents a share in merger expenses after tax. During the third quarter of 2011, the company earned 76 cents a share.
KBW analyst Catherine Mealor rates City Holding Company "Outperform," with a $38 price target, saying late last month that "CHCO continues to deliver its strategy of 'high profitability with reasonable growth,'" and that the company "has maintained exceptional asset quality, consistent profitability, and impressive capital management skills through a combination of a strong dividend, share buybacks, and accretive and attractively priced acquisitions."
City Holding Company repurchased about 238,000 shares during the first half of 2012, and was authorized to buy back another 455,000 shares as of June 30.
Interested in more on City Holding Company? See TheStreet Ratings' report card for this stock.
2. Bank of Hawaii
Bank of Hawaii
of Honolulu closed at $45.44 Tuesday, returning 5% year-to-date, following a 2% decline last year. With a quarterly payout of 45 cents, the shares have a dividend yield of 3.96%.
The shares trade for 2.2 times tangible book value, and for 13 times the consensus 2013 EPS estimate of $3.44. The consensus 2012 EPS estimate is $3.58.
For the 12-month period ended June 30, the bank's ROA was 1.22%, and its ROE was a very respectable 17.17%. During the same period, Bank of Hawaii's dividend payout ratio was 49.52%.
The consensus among analysts is for Bank of Hawaii to report third-quarter earnings of 89 cents a share, declining from 90 cents in the second quarter, and 92 cents during the third quarter of 2011.
Sterne Agee analyst Brett Rabatin has a neutral rating on Bank of Hawaii and said in late July after the company reported its second-quarter results that "given low re-investment rate opportunities, investors are likely to remain concerned about revenue pressure for BOH going forward," but also said that an "improved outlook for expense management and more confidence on a potential base level of spread revenue in FY14 leads us to believe BOH is a solid defensive holding given the sustainable cash dividend, share buyback, and likelihood the ROA remains above 1% in the low interest rate environment."
Bank of Hawaii bought back 1.1 million common shares for $50 million. On July 20, the company's board of directors authorized another $75 million in common share buybacks, and was authorized to repurchase $95.8 million in additional shares, as of that date.
Darst said that "the bottom line is the shares likely have less downside than peers if bank stocks trend downward with macroeconomic concerns, but catalysts for the shares to reach the $50 range appear limited."
Interested in more on Bank of Hawaii? See TheStreet Ratings' report card for this stock.
1. FirstMerit Corp.
of Akron, Ohio, closed at $14.83 Tuesday, returning 1% year-to-date, following a 20% decline during 2011. Based on a quarterly payout of 16 cents, the shares have a dividend yield of 4.32%.
The shares trade for 1.5 times tangible book value, and for 12 times the consensus 2013 EPS estimate of $1.27. The consensus 2012 EPS estimate is $1.21.
For the 12-month period ended June 30, FirstMerit's ROA was 0.85%, and its ROE was 11.14%. During that period, the company's dividend payout ratio was 56.76%.
The company last month announced a deal to acquire
Citizens Republic Bancorp
( CRBC) of Flint, Mich., for roughly $912 million in cash and stock. Citizens Republic had $9.6 billion in assets as of June 30. First Merit said the acquisition would double its branch network and create "a unique, contiguous Midwest banking franchise, expanding FirstMerit's footprint into Michigan and Wisconsin, as well as strengthening its presence in Northeast Ohio."
The deal is expected to close during the second quarter of 2013, and First Merit plans to repay Citizens Republic Bancorp's "approximately $345 million of TARP preferred stock, which includes $45 million of estimated deferred dividends, held by the U.S. Treasury at closing," for bailout assistance received from the government.
The consensus among analysts is for the company to report third-quarter earnings of 32 cents a share, increasing from 28 cents in the second quarter, and 29 cents during the third quarter of 2011.
Oppenheimer analyst Terry McEvoy rates First Merit "Perform," saying on Tuesday that "After having a few weeks to digest and appraise the FirstMerit/Citizens Republic deal, we now believe that the underlying assumptions behind the transaction are conservative, which in turn could drive 2014 earnings above consensus." The consensus 2014 EPS estimate is $1.47.
The analyst said that "ideally, we think owning the stock shortly after the deal closes (2Q13) provides the most potential for upside, but would not discourage more patient investors looking at the stock today given the current dividend yield," adding that "investor sentiment on FirstMerit should improve following the merger just like it did in 2010 after the Midwest Bank deal."
Interested in more on FirstMerit? See TheStreet Ratings' report card for this stock.
Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.