(The following story is the first in a two-part series on bank and thrift stocks that outperformed their peers last year and still pay attractive dividends.)NEW YORK ( TheStreet) -- Investors usually must choose between stock-price appreciation and big dividends. But a select group of small banks have seen their shares jump, with one posting an 18% increase this year while the S&P 500 Index has fallen 5%. Another is paying a dividend almost twice as high as the benchmark 10-year Treasury bond yield. Following an earlier look at three bank stocks with outsized dividends, published in November, this expanded list features more conservative measures, excluding companies whose dividend payouts exceeded their 2009 net income. The group was pared further by leaving out current participants in the Troubled Asset Relief Program, or TARP. Thinly traded names were also avoided, as were those with a Texas ratio of more than 20%. (The Texas ratio is nonperforming loans/core capital and loan loss reserves.)
When we previously mentioned New York Community's outsized dividend, the shares were yielding 9.43%. After the recent appreciation, the yield is 6.61% -- still attractive for such a strong banking franchise. New York Community's shares are selling for 1.2 times book value, slightly more than SNL Financial's index of banks with more than $10 billion in assets. The price-to-earnings ratio (factoring out the gain on the bargain purchase of AmTrust) is 13, less than the peer group's 15. Several analysts put "neutral" ratings on New York Community after the recent run-up in the stock and the one-time gain in the fourth quarter. Peter Winter of MBO Capital Markets lowered New York Community's 2010 earnings projections to $1.25 from $1.37 a share to factor in higher-than-expected loan-loss provisions as well as expenses related to the integration of AmTrust. He estimates earnings of $1.50 a share for 2011 and has a 12-month price target of $16. New York Community is a worthy choice for a conservative long-term bank play with a generous dividend. But after the shares have risen so much, they may not be appropriate for investors looking for quick gains.
The improvement in fourth-quarter earnings mainly reflected a decline in provisions for loan-loss reserves to $6.7 million from $12.2 million in the third quarter and $8 million a year earlier. The ratio of net charge-offs (loan losses) to average loans for 2009 was 0.67%. United Bankshares has kept ahead of the pace of loan losses, with reserves covering 1.44% of total loans as of Dec. 31. The shares closed at $24.25 last Wednesday, up 18% this year. While United Bankshares has remained profitable, with capital ratios rising through 2009 and asset quality remaining decent, the volatility of the shares makes this attractive dividend pick only suitable for long-term investors.
Despite increased credit costs, Dime's overall asset quality is strong. The nonperforming-asset ratio was 0.32% as of Dec. 31, a low level of problem loans and repossessed real estate even in a strong economy. The industry aggregate was 3.07% as of Sept. 30, according to the FDIC. More importantly, loan losses have been light, with a ratio of net charge-offs to average loans of 0.27% for 2009. The company stayed ahead of the pace of loan losses, with reserves covering 0.63% of total loans as of Dec. 31. Despite years of stability and very low credit risk, Dime hasn't been a strong earnings performer, as full-year ROA hasn't exceeded 1% since 2005. The shares haven't shown much life lately and trade for 1.4 times book value and 15 times earnings, which trails an aggregate P/E ratio of 16 for SNL Financial's thrift index. However, Dime's year-end P/E ratios ranged between 19 and 21 for 2006 through 2008. Analysts' opinions are mixed. Supporting a "neutral" rating for the shares, Sterne Agee analyst Matthew Kelly was "incrementally more positive," saying loan growth would push earnings "closer to a 1% ROA" by the end of 2010. Kelly said a secondary offering of common shares was a possibility for the company to fund new growth. The tier 1 leverage capital ratio for main subsidiary Dime Savings Bank of Williamsburg was 7.59% and the total risk-based capital ratio was 11.22%. While these ratios are well above the 5% and 10% required by regulators for most banks and thrifts to be considered well-capitalized, they're not excessive during recessions, and support Kelly's comment.
Barclays Capital analyst Bruce Harting has an "overweight" rating (equivalent to a "buy") on the shares, with a 12-month price target of $15. Dime Community Bancshares represents a very conservative choice, and it's trading significantly below its historical P/E levels. An investor considering the stock might face some dilution over the short term, but this is a strong company that has weathered the crisis well and has an amazingly long track record of solid credit quality. -- Reported by Philip van Doorn in Jupiter, Fla.