The S&P Index has an average dividend yield of just 1.4%. For those requiring income to support retirement, this is a disappointing yield. I look for solid companies providing higher yields. In this article, we will examine three companies in the regional banking industry that provide a dividend yield that is at least 100 basis points higher than the average yield of the market index.
Huntington Bancshares
Huntington Bancshares provides mortgages, equipment leasing, investment management and brokerage operations to customers in six states, primarily in the Midwest. The company has more than 800 total offices in Illinois, Indiana, Kentucky, Ohio, Michigan, Pennsylvania and West Virginia. Huntington Bancshares expects to complete its merger with TCF Financial by the end of the month. The company is valued at $21.4 billion today and generated revenue of $4.81 billion last year.
Huntington Bancshares last raised its dividend for the Oct. 1, 2019 payment date. Like many other names in the industry, the company’s dividend has been frozen since mid-2019 due to the unknown impacts of the Covid-19 pandemic last year. Huntington Bancshares has now issued the same payment for eight consecutive quarters. A raise anytime this year would continue Huntington Bancshares’ dividend growth streak, which current stands at 10 years.
Like many in the financial sector, Huntington Bancshares cut its dividend drastically during the financial crisis, with shareholders seeing their dividend reduced from $1.06 in 2007 to just 4 cents in 2009. This was a 96% decline. The company then maintained its dividend in 2010 before more than doubling it in 2011. The dividend has a compound annual growth rate of 19.6% over the last 19 years
Shareholders currently receive a total of 60 cents in annual dividends. With a current share price of $14.36, Huntington Bancshares has a yield of 4.2%, three times that of the average yield of the S&P 500. Huntington Bancshares has an average dividend yield of 3% since 2011, so investors are getting paid more than usual to own the stock.
According to Yahoo Finance, Huntington Bancshares is expected to earn $1.46 per share in 2021. The projected payout ratio for 2021 is 41%, almost in-line with the 10-year average payout ratio of 38%.
Using the current share price and earnings estimates for the year, the stock has a forward price-earnings ratio of 9.8. For context, the stock has an average price-earnings ratio of 12.5 over the last decade.
Huntington Bancshares is also trading at a discount to its intrinsic value as calculated by the GuruFocus Value chart.
Shares have a GF Value of $16.34, giving Huntington Bancshares a price-to-GF-Value ratio of 0.88. The stock would return 13.8% were it to trade with its GF Value. Adding in the dividend yield, total returns could reach into the high double-digit range. Huntington Bancshares is rated as modestly undervalued by GuruFocus.
Huntington Bancshares’ dividend did not survive the most recent recession, but has experienced substantiable growth over the last decade. It has been some time since the company raised its quarterly dividend, but the stock provides a superior yield to both its own history and to that of the market. In addition, Huntington Bancshares appears undervalued relative to its own historical average valuation as well as to its GF Value. Investors looking for exposure to the regional banking industry could see strong returns from the stock.
KeyCorp
KeyCorp (KEY, Financial) has nearly 1,100 branches and 1,400 ATMs spread out over 15 states, most of which are located in the northern U.S. The company generated revenue of $6.72 billion last year and is currently valued at $21.3 billion.
KeyCorp's most recent dividend raise took place for the June 14, 2019 payment. The company’s dividend growth streak would extend from its current streak of 10 years with a raise anytime during this year.
Shareholders received three consecutive years of dividend cuts in 2008 to 2010. The end result was that the dividend was reduced by more than 97% from 2007 levels. On the plus side, the dividend has increased every year since 2011, but it still sits at just about 50% of its 2007 high. The dividend has a CAGR of 22.2% over the last decade.
Annual dividends amount to 74 cents. Shares trade hands at $21.50 at the moment, equating to a dividend yield of 3.4%. The 10-year average yield is 2.6%, so KeyCorp has a higher than usual yield.
KeyCorp is projected to earn $2.17 per share this year, which results in an expected payout ratio of 34%. The average payout ratio since 2011 is 32%, so the dividend looks well-covered.
The stock has a forward price-earnings ratio of 9.9 against a 10-year average price-earnings ratio of 12. KeyCorp hasn’t traded with a single-digit multiple since 2012, making the stock look undervalued compared to its own history.
Looking at the GF Value, KeyCorp looks to be appropriately priced.
KeyCorp has a GF Value of $20.10, giving shares a price-to-GF-Value ratio of 1.07. The stock would need to fall 6.5% to reach its GF Value.
KeyCorp’s experience during the last recession was significantly worse than most peers. The dividend cut was enormous. That being said, dividend growth has been exceptional over the last 10 years even if the dividend is still not back to its pre-Great Recession levels. Shares look inexpensive compared to their long-term history and the yield is higher than usual, making KeyCorp a decent purchase option for those looking for income.
Westamerica Bancorp
Westamerica Bancorp (WABC, Financial) is a regional community bank that has nearly 80 branches located in Central and Northern California. The company provides savings, checking and money market accounts to clients as well as commercial, construction and residential real estate loans. Westamerica Bancorp had $200 million in annual revenues last year and has a market capitalization of $1.64 billion today.
Westamerica Bancorp last raised its dividend for the April 15, 2019 payment date. The company’s dividend growth policy is slightly different than most others in that it tends to raise its quarterly dividend every other year. Shareholders typically receive the raise in the fourth quarter of the year so that the dividend growth streak, which stands at 28 years, is maintained. Due to its growth policy, the dividend has compounded at a rate of just 1.2% over the last 10 years. If the company sticks to its usual pattern, shareholders will likely see a raise in the fourth quarter of this year.
The dividend should be at least $1.64 this year. Westamerica Bancorp is trading at $60.50, giving the stock a dividend yield of 2.7%. Shares have an average yield of 3% since 2011, so the yield is lower than normal, but still higher than what the market index is offering.
Analysts believe Westamerica Bancorp will earn $3.03 per share in 2021, which gives a projected payout ratio of 54%. The company’s long-term average payout ratio is 60%, so the dividend looks to be in good shape.
Shares have a forward price-earnings ratio of just under 20, which is nearly in-line with the average price-earnings ratio of 20.4 that the stock has traded with since 2011.
Westamerica Bancorp is also trading below its GF Value at the moment.
With a GF Value of $62.78, Westamerica Bancorp has a price-to-GF-Value ratop of 0.96. Shares would provide a return of 3.8% were they to reach GuruFocus’ estimate of intrinsic value. Factor in the dividend and the total return could be in mid-single-digit range. Westamerica Bancorp receives a rating of fairly valued.
Westamerica Bancorp has an unusual dividend growth policy, but was able to maintain its dividend through the Great Recession. This is a positive most other banks do not have. Dividend growth over the last decade has been lackluster, but the stock does provide a yield that is more than a full percentage point better than that of the market. Shares also appear to be slightly undervalued as well. Investors looking for more dividend security from a regional bank might want to consider buying shares of Westamerica Bancorp.
Final thoughts
Those looking for income can still find it even in this low yield environment. Huntington Bancshares, KeyCorp and Westamerica Bancorp all provide dividend yields that top that of the S&P 500 index.
Huntington Bancshares and KeyCorp might be the riskier of the names discussed here just because of the dividend cuts during the Great Recession. However, these two also provide more in the way of income at the moment and have considerably higher dividend growth rates compared to Westamerica Bancorp. All three regional banks have very low projected payout ratios for 2021, implying that the dividends are on much more solid footing than they were previously.
The more risk adverse income investor might favor Westamerica Bancorp just because of its dividend growth streak, while those desiring more income and higher dividend growth rates could be partial to Huntington Bancshares and KeyCorp.
Author disclosure: the author has no position in any stock mentioned in this article and has no intention of initiating a position in the next 72 hours.
