During the credit crisis, many banks had to move to protect capital by halting buybacks and cutting or eliminating dividends altogether. Now that the crisis is behind us, we are starting to see that path reversed and many analysts think that banks could be one of the leading sectors for dividend growth.
Banks are starting to take money out of loan loss reserves as nonperforming loans are decreasing back towards pre-crisis levels, and this adds cash to the income account that can be used to increase dividend payouts.
Investors who favor a dividend growth approach should be adding many of the regional and community banks to their portfolio while they are still cheap.
Susquehanna Bancshares (SUSQ)
Susquehanna Bancshares (SUSQ) is expected to be one of the leading dividend growth bank stocks. Over the past five years the bank has increased the payout by an average of more than 11% annually. At least one research service, Value Line, estimates that the annual rate of increase will be 20% over the next five years.
Earlier this year, Susquehanna raised its payout by 13%, and the stock currently yields 3.6%. SUSQ also authorized a 3.5% share buyback, which should help support the stock price. Susquehanna has 245 branches in the Mid-Atlantic region with more than $18 billion in assets. It is a very attractive franchise, so I would not be surprised to get up one morning and find that a larger regional has made a bid for the bank.
Webster Financial (WBS)
Connecticut-based Webster Financial (WBS) slashed its dividend to preserve capital back in 2009 but have now started to raise the payment once again. The payout has gone from four cents per share after the 2009 cut to an annualized rate of 80 cents today. At that rate, WBS stock yields 2.8% and Value Line estimates that the payout will continue rising by about 19% annually for the next several years.
The bank raised its payout by one-third back in April and more increases are likely on the way form Webster Financial. With 166 branches between New York and Boston and $21 billion in assets, Webster is also a potential buyout candidate at some point in the future, as are most banks today.
East West Bancorp (EWBC)
East West Bancorp (EWBC) is another bank that has done a fantastic job of ramping up its dividend payout after slashing in 2009 to protect the balance sheet. The payout has grown from five cents per share to 72 cent per share, and it is estimated by Value line that the payout will grow by 16% per year going forward.
East West Bancorp serves the Chinese American community in the U.S. and has opened branches in mainland China to better serve its target markets. At the current price, the stock yields 2.2%, and that payout should just grow along with the bank going forward.
Banks have come through a difficult periods but those that have survived should be dividend growth leaders going forward.
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As of this writing, Tim Melvin was long SUSQ.