New York Community Bancorp (NYCB) is one of the largest 25 bank holdings companies in the U.S. While the stock has appreciated in recent years, its dividend yield still nears 6%, making it an intriguing potential investment opportunity in a low-yield environment.
Even throughout the financial crisis, the company was able to avoid cutting its dividend, allowing investors to capitalize on a 10% yield in 2009. The company has never posted an annual loss and has supported the dividend regardless of EPS fluctuations.
How attractive is the company to prospective investors and how big is the risk of a future dividend cut?
The business
NYCB has originated $57.3 billion in multi”family loans since its founding, garnering an impressive average net charge-off rate of only 0.04% since 1993, a strong testament to its underwriting discipline. Since January 2010, its residential mortgage banking operation has originated $38.0 billion of 1”4 family loans for sale and generated mortgage banking income of $584.4 million. Ventures such as this have helped assets grow from $1.9 billion to $48.6 billion since its first acquisition in November 2000.
Competitive advantages
NYCB’s focus on multi-family lending in markets it knows well has contributed to the bank's record of asset quality.
NYCB is the leading producer of multi”family loans in New York City; 61% of the rental housing units in New York City are subject to rent regulation and therefore feature below-market rents. Rent-regulated buildings are more likely to retain their tenants and, therefore, their revenue stream in downward credit cycles. Multi-family loans are also less costly to produce and service than other types of loans.
The bank's commercial real estate loans feature the same structure as its multi”family loans.
This focus has allowed the company to maintain an impressively low level of net charge”offs in downward credit cycles.
Valuation
NYCB recently declared a $0.25 quarterly dividend – marking the 81st consecutive dividend as a public institution and its 42nd quarterly cash dividend of $0.25 per share. This results in a 5.9% dividend yield with a payout ratio of around 90%. While this high payout ratio appears to be a risk, the superior asset quality we discussed earlier mitigates this significantly.
However, NYCB has nearly $49 billion in assets. The threshold for becoming a Systematically Important Financial Institution (SIFI) sits at $50 billion. Crossing this line results in additional regulation, including the possibility of being forced to pay out a lower dividend.
Here is management’s take on this:
"It is not our intention to exceed the current SIFI threshold until we engage in a transaction that is significantly earnings accretive, as well as accretive to our tangible book value per share. As I've also mentioned, we have the tools at our disposal to keep growing our primary asset and generating earnings while at the same time managing our balance sheet growth."
Without an attractive acquisition candidate, management could "conceivably [avoid the $50 billion mark] for the next couple of years."
Conclusion
While purposely staying beneath this critical $50 billion market has stunted EPS' growth (as seen below), the company has maintained a steady stream of dividends and has done much to continually improve its already stellar portfolio quality.
Given management's historical attention to credit quality and proven ability to make accretive acquisitions, the risk of a poor acquisition seems low. So currently, investors look to get a stable and attractive dividend yield and a management team capable of creating value should it wish to cross the SIFI asset threshold.
For more ideas like this one, reference GuruFocus’ High Yield Dividend Stocks Screener or the rest of R. Vanzo’s Articles.
