Is 7.8% Dividend Reason Enough to Buy a Bank Stock?

NYB payouts might not be sustainable, so the answer is ‘no’

   

Is 7.8% Dividend Reason Enough to Buy a Bank Stock?

AskTheEditor logo2 300x200 Is 7.8% Dividend Reason Enough to Buy a Bank Stock?Last week, Carl wrote me to ask about New York Community Bancorp, Inc. (NYSE:NYB). So I thought I’d share my analysis with the rest of you, in case this is a stock you’re watching.

As the name implies, New York Community Bancorp is a regional bank around Long Island, focusing on multi-family mortgage loans in New York City, with an emphasis on apartment buildings that feature below-market rents. It’s around $5 billion in market size, with assets of $42 billion.

Most importantly (at least to Carl) is the fact that it pays 25 cents each quarter for a very hefty 7.9% dividend yield.

So should you buy NYB stock?

For starters, I’m very iffy on financial stocks in general due to the uncertainty around regulation/reform and non-stop scandal as of late. New York Community Bancorp is, of course, a niche play that focuses mainly on apartments and is far less likely to be involved in shenanigans like the “London Whale” at JPMorgan Chase (NYSE:JPM) or the money laundering for drug lords at HSBC (NYSE:HBC). But color me skeptical of the whole sector, regardless of the size or scope of operations.

The whole sluggish U.S. economy thing also tends to not be good for banks, of course.

But that said, if you are the kind of person who is more bullish on the sector or just wants to dabble for the sake of diversification then let’s look at NYB.

First, the dividend. I’ll concede that the yield is very nice … but I have concerns about its sustainability. Though NYB has avoided cutting its dividend as banks like Citigroup (NYSE:C), Bank of America (NYSE:BAC) and others did during the financial crisis, it hasn’t raised it in a while either. That’s because the dividend payout ratio is a very shaky 90% of earnings right now.

In other words, almost every penny in profits goes back out to shareholders. In fiscal 2011, for example, the company posted earnings per share of $1.09. At 25 cents a quarter, it paid $1 a share in dividends.

That’s cause for concern. The Fed surely will not permit a dividend increase (they hold the keys with their “stress tests” remember?) with that kind of balance sheet.

Secondly, I am concerned with the overall growth prospects — or lack thereof. Revenue has declined for six consecutive quarters on a year-over-year basis, so have earnings. Profits are back to around 2009 levels. Barring a secular recovery in the housing market that would juice rents, it looks like that trend will persist and weigh on shares at least for the short term.

So my verdict is that as an income play, the nearly 8% dividend is good but I question the sustainability. And if that dividend does get cut you have little reason to stick by it since the shares won’t do you squat for some years. A look at the charts for NYB back before the recession showed it stuck around the $16-$17 range for most of the time so even in a full-on bull market you may only see 20% to 30% appreciation in the stock itself.

Of course, if you’re willing to take on some risk it may be worth your while to take a stab at New York Bancorp while it’s in the midst of some hard times. A long-term play in this stock could serve you very well if dividends start increasing and shares move up across the next several years.

But there’s no guarantee you won’t have an opportunity to buy in at the exact same valuation and dividend level a year or two from now. So there might not be much to gain by buying in at this moment.

I’d put my money to work elsewhere.

Do you have a stock that’s on your mind? Drop me a line at editor@investorplace.com and I’ll take a look at it.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/07/is-7-8-dividend-reason-enough-to-buy-a-bank-stock/.

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