3 Liquid Bank Stocks With Highest Dividend Yields (Update 1)

Updated with comments on the "fiscal cliff" from FBR financial policy analyst Edward Mills.

NEW YORK ( TheStreet) -- Even though the "fiscal cliff" may put a damper on dividend income, many bank stocks are paying dividend yields that are especially attractive in the prolonged low-rate environment.

With the presidential election has been settled, FBR financial policy analyst Edward Mills wrote on Wednesday morning that although "it will take several days for the full narrative of the election to develop, we view the result as significantly increasing the volatility related to the negotiations on the 'fiscal cliff.' With a slim margin for the President and Republican control of the House, both sides could argue that they have the upper hand in negotiations and will view the election as a validation of their positions."

The "fiscal cliff" refers to the expiration of tax cuts enacted when George W. Bush was president and extended by President Obama in August 2010, as a result of negotiations with Republican members of Congress to raise the federal debit ceiling. Without further action from the President and Congress, the tax cuts will be reversed, and there will be major federal spending cuts, which many economists believe will push the U.S. economy back into recession.

Mills said that with President Obama being reelected, while the Rebublicans maintained control over the House of Representatives, "We do believe that the chances of going off the cliff (at least temporarily and before a deal is reached to punt) has increased."

For income-seeking investors, the biggest immediate headache if we fall off the fiscal cliff will be the elimination of the 15% maximum federal income tax rate on qualified dividend income. Investors will need to carefully analyze investment options according to their federal and state tax scenarios.

Of course, with interest rates being so low for so long, many investors will still find many common stocks, including bank stocks, with attractive dividend payouts, when compared to other income investment alternatives.

TheStreet last month used a conservative approach to identify five bank stocks that are actively traded with relatively safe dividends, as the group had paid dividends of less than 60% earnings over the previous 12 months. This group was also limited to stocks rated a "Buy" by TheStreet Ratings.

This time we have simply identified the three actively traded banking names with the highest dividend yields based on regular quarterly payouts, without considering the dividend payout ratio, ratings, or even the level of profitability. This "stick to the wall" approach provides a list of names with very attractive dividend yields, most of which have paid dividends nearly equal to their earnings over the past year.

Then again, the group is solidly profitable, and even the Federal Reserve appears set to allow some of the large banks facing the greatest scrutiny to pay out a high percentage of earning next year.

Considering how much excess capital some of the large regional players have, even the Federal Reserve is expected to allow some banks to return capital in 2013 through dividends and share buybacks in amounts close to or even exceeding earnings, following the next round of regulatory stress tests early next year.

That being said, a high dividend payout ratio underlines the need for a prospective investor to scrutinize the company, and the stock, and carefully consider investment objectives and horizons before jumping in.

By limiting our selection to companies with high dividend yields based on regular quarterly dividends we have left out a few stocks of bank holding companies that are paying out "variable" dividends based on earnings performance and on a strategy of reducing excess capital. One of these companies is First Financial Bancorp ( FFBC) of Cincinnati, which pays a regular quarterly dividend of 15 cents a share, plus a variable dividend each quarter, in order to pay out 100% of earnings. Based on the company's third-quarter earnings of 28 cents, the company declared a variable dividend of 13 cents a share, for a 28-cent dividend and a yield of 7.23%, based on Monday's closing price of $15.50.

First Financial also has a new share buyback in place, under which the company expects "repurchase approximately 1,000,000 shares annually over a five year period," according to CEO Claude Davis, who said on Oct. 25 when the company announced its third-quarter results that "repurchases are not anticipated to impact the variable dividend, which we expect to continue through 2013 unless the Company's capital position changes materially or capital deployment opportunities arise that move us towards our capital thresholds sooner than expected." Davis also said that "despite returning greater than 100% of our earnings to shareholders through 2013 and targeting a long term return of 60% - 80% of the capital we generate through dividends and share repurchases, we expect to maintain a sufficient level of excess capital to support growth initiatives."

Here are the three actively traded bank stocks -- with average daily trading volume of at least 50,000 shares --with the highest dividend yields, based on ordinary quarterly payouts, according to data supplied by Thomson Reuters Bank Insight:

3. Peoples United Financial


Shares of Peoples United Financial ( PBCT) of Bridgeport, Conn., closed at $11.94, down 2% year-to-date, after declining 4% last year.

Based on a quarterly payout of 16 cents, the shares have a dividend yield of 5.36%.

The shares trade for 1.4 times tangible book value, and for 15 times the consensus 2013 EPS estimate of 82 cents.

Peoples United had $28.6 billion in total assets as of Sept. 30. The company reported third-quarter net income of $62.2 million, or 18 cents a share, declining from $64.6 million, or 19 cents a share, in the second quarter, but increasing from $51.5 million, or 14 cents a share, in the third quarter of 2011. The sequential earnings decline reflected an increase in the provision for loan loss reserves to $15.1 million from $10.6 million, as the company made a special $5.7 million provision for losses on acquired loans, after acquiring 57 branches from Royal Bank of Scotland Group PLC ( RBS) subsidiary RBS Citizens NA.

Peoples United saw its net interest income decline to $234.8 million in the third quarter, from $235.6 million the previous quarter, and $237.7 million a year earlier, as the net interest margin narrowed to 3.89% from 3.96% in the second quarter, and 4.07% in the third quarter of 2011.

Third-quarter noninterest income totaled $81.4 million, increasing from $75.7 million the previous quarter, but declining from $84.7 million a year earlier, when the company booked $8.6 million in securities gains. The sequential increase in noninterest income reflected increases in brokerage fees and in gains on the sale of residential mortgage loans.

Average loans grew by 1% sequentially and 4% year-over-year, to $20.7 billion in the third quarter.

The company's third-quarter operating ROA was 0.88%, declining from 0.93% the previous quarter, but increasing from 0.77% a year earlier. First United reported that the third-quarter return on average tangible equity was 8.3%, declining from 8.5% in the second quarter, but increasing from 6.1% in the third quarter of 2011.

Peoples United repurchased 13.5 million common shares for $164 million during the first three quarters, and had 4.5 million shares authorized for buybacks under its repurchase plan.

Sandler O'Neill analyst Mark Fitzgibbon rates Peoples United a "Hold," with a price target of $12.50, and said on Oct. 18 that third-quarter "operating results were generally in line with our expectations," and that "we have a difficult time seeing the company get to a double digit return on capital anytime soon."

Fitzgibbon also said that "as a result of the balance sheet growth, stock buybacks and dividends, the tangible common equity ratio fell from 11.5% to 11.2%, still a comparatively high ratio." The analyst also pointed out that the dividend on common shares "represents a core dividend payout ratio of 86%," and said that "while we recognize that PBCT is overcapitalized, we continue to think that there is a risk that at some point the regulators could push the company to lower the payout ratio."

It will be of great interest to investors to see if Peoples United's board of directors decides to curtail the buybacks in order to reduce the possibility of a dividend cut down the line.

PBCT Chart PBCT data by YCharts

Interested in more on Peoples United Bancorp? See TheStreet Ratings' report card for this stock.

2. Valley National Bancorp


Shares of Valley National Bancorp ( VLY) of Wayne, N.J., closed at $9.63 Monday, down 14% year-to-date, after a 4% decline during 2011.

Based on a quarterly payout of 16.3 cents, the shares have a dividend yield of 6.77%.

The shares trade for 1.8 times tangible book value, and for 14 times the consensus 2013 EPS estimate of 71 cents.

Valley reported third-quarter earnings of $39.4 million, or 20 cents a share, increasing from $32.8 million, or 17 cents a share, in the second quarter, and $35.4 million, or 20 cents a share, in the third quarter of 2011. During the third quarter, noninterest totaled $40.4 million, increasing from $24.0 million the previous quarter, and $20.2 million a year earlier, with nearly all of that increase happening as "Valley shifted the majority of its residential mortgage production to an 'originate and sell' model during the third quarter."

The company booked gains on mortgage loan sales of $25.1 million in the third quarter, increasing from $3.1 million the previous quarter, and $2.9 million a year earlier. The increased noninterest income was partially offset by a higher income tax rate.

Valley's third-quarter ROA was 0.99%, increasing from 0.83% in the second quarter, and matching the ROA a year earlier. The company reported a third-quarter return on average tangible equity of 14.86%, increasing from 12.49% in the second quarter, and 14.59% in the third quarter of 2011.

KBW analyst Damon DelMonte rates Valley "Market Perform" with a price target of $9.50, and said on Oct. 25 that "we look for sustained mortgage banking activity to buoy earnings as spread income comes under pressure," and lowered his 2013 earnings estimate for the company by a penny to 69 cents a share.

DelMonte said that "Valley has processed over $2.7b in residential mortgage applications, of which the bank's approval rating on the applications is roughly 70%," and that "loan pipelines remain extremely strong and fourth-quarter results should be at a similar level to the third quarter." The analyst went on to say that "what's really promising regarding the level of mortgage banking, is that despite the recent success, Valley's recently entered New York markets remain extremely under-penetrated, providing the bank great opportunity to further increase market share."

VLY Chart VLY data by YCharts

Interested in more on Valley national Bancorp? See TheStreet Ratings' report card for this stock.

1. New York Community Bancorp


Shares of New York Community Bancorp of Westbury closed at $13.50 Monday, returning 18% year-to-date, following a 30% decline during 2011.

Based on a quarterly payout of 25 cents, the shares have a dividend yield of 7.41%.

The shares trade for 1.9 times tangible book value, and for 13 times the consensus 2013 EPS estimate of $1.03.

New York Community Bancorp reported third-quarter earnings of $128.8 million, or 29 cents a share, declining from $131.2 million, or 30 cents a share, in the second quarter, but increasing from $119.8 million, or 27 cents a share, in the third quarter of 2011.

The company's third-quarter net interest income declined to $285.0 million, from $296.7 million in the second quarter, and $295.0 million in the third quarter of last year, while the net interest margin narrowed to 3.17% in the third quarter, from 3.30% the previous quarter, and 3.33% a year earlier.

New York Community Bancorp also said in its earnings release that "although loan production rose as the low level of market interest rates prompted a rise in refinancing activity, the replenishment of the loan portfolio occurred at lower yields," and that "the impact was somewhat tempered by the high level of prepayment penalty income from multi-family and commercial real estate loans held for investment, and by a meaningful increase in the average balance of loans." The company added that it "continued to reduce its cost of interest-bearing deposits, largely reflecting the benefit of its acquisition of Aurora Bank."

During New York Community's earnings conference call, CFO Thomas Cangemi said that "looking at Q2 versus Q3 our guidance was down 12 to 15 basis points and thus we came in at the low end our range," and that "my guess is that where we sit today, given where the interest rate environment is and looking at the loan pipeline, we are probably going to be on that same level, so probably down 12 to 15 in Q4," excluding loan prepayments.

Cangemi also said he expected the company to "see the bottom of the margin... well within 2013."

New York Community Bancorp continued its strong earnings performance, with a third-quarter operating return on average assets of 1.19%, according to Thomson Reuters Bank Insight, and a return on tangible equity of 18.06%, some analysts over the years have repeatedly questioned the attractive quarterly dividend payout of 25 cents, which the company has maintained for 35 consecutive quarters.

Fitzgibbon said on Oct. 24 that during the third quarter, "the dividend payout ratio declined to 78% (currently a 6.9% dividend yield). However, we remain concerned that over time banking regulators will pressure institutions with high payout ratios to right-size their distributions."

Fitzgibbon rates New York Community Bancorp a "Hold," with a 12-month price target of $14.50.

The analyst said "in light of the quarterly results and updated guidance from management, we are raising our 2012 core EPS estimate by a $0.06 to $1.17, but lowering our 2013 EPS estimate by $0.07 to $0.98," adding that "we continue to believe that shares of NYB are approaching fair value at just over 2x tangible book value versus the peer group median of about 1.5 times TBV," and that "on a forward earnings basis, shares are currently trading at 14.9x our 2013 EPS estimate versus the peer group median of 12.8x."

NYB Chart NYB data by YCharts

Interested in more on New York Community Bancorp? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

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.

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