The bank stress
test results are in; later this week, the review of capital plans will be
released by the Fed as well. This will tell which of the big banks will be able
to go ahead with their planned dividend increases and share buybacks.
With
20 of the 30 biggest banks passing the rather tough test, it is
expected to see strong increases in both. Given the recovery in the banking
system, this should continue into the foreseeable future. Bank Analyst Dick
Bove at Rafferty Capital thinks that the banks stock are poised to double in
value over the next few years as a result of the improvements in the condition
of the banks.
As
exciting as this story is, it is even more so for the smaller banks.
During
the financial crisis, many banks reduced or eliminated
their dividend payout and halted buyback programs to preserve
capital. The banks are now starting to resume and raise dividends, and buy back
stock in the open market. Many of them are doing so at a discount-to-book value
and the buybacks will significantly improve shareholder value.
The
smaller banks are much cheaper than their larger competitors, as measured by
price-to-book value and tend to be far less volatile. While big banks can trade
on every headline and tidbit of news, the smaller banks are hard for the fast
money crowd to trade.
The small bank
stocks could be the best dividend growth and buyback story of the next decade.
Westfield Financial (NASDAQ: WFD) is a great example of a little bank
that is working to improve shareholder value. The bank is located in Westfield,
Massachusetts, and has 13 branches with about $1.2 billion in assets. The have
an equity-to-asset ratio of 11.53 and nonperforming assets are a minuscule .20
percent of total assets.
The bank has
been buying back stock at a steady rate and since 2009, the share count has
gone from more than 29 million outstanding to just 19.4 million today. During
the same time frame, the dividend has gone from $.20 a share to $.24 — that’s
a growth rate of about 4.6 percent annually. The stock currently yields 3.6
percent and trades right at its tangible book value.
ESSA Bancorp (NASDAQ: ESSA) is a 27-branch bank in Stroudsburg,
Pennsylvania, with $1.35 billion in assets. The bank is in fantastic financial
shape, with equity-to-assets ratio and nonperforming assets that are just 1.9
percent of total assets.
The bank
just announced a 40 percent increase in the quarterly dividend payout and
another five percent stock buyback. This will be the sixth such buyback plan
for the bank since its IPO in 2007. The dividend has gone from $.08 a share to
the current level of $.28 in the past five years, while the share count has
dropped from 16 million shares to just 12 million today. The stock trades at
just 87 percent of tangible book value and yields two percent at the current
price.
It took a
push from activist investor Joseph Stilwell to set things in motion, but HopFed Bancorp (NASDAQ: HFBC) doubled its dividend payment last
year and also announced a five percent buyback program. HopFed is the holding
company for Heritage Bank in Hopkinsville, Kentucky.
Heritage has
18 offices in western Kentucky and middle Tennessee and about $967 million in
assets. The equity-to-asset ratio is 10.97 and nonperforming assets are just
1.22 percent of total assets, so they are in good financial shape. The stock
trades at less than 90 percent of book value and the stock is yielding one
percent at the current level.
In addition
to the prospects of future buybacks and dividend increases, there is a strong
chance that Mr. Stilwell successfully pushes management into selling the bank
at a higher price.
The big
banks passing the stress test and the possibility of increased dividends and
buybacks in the near future has captured the headlines. However, the real
dividend growth and stock buyback story would appear to be in the smaller
regional and community bank stocks.
Read more
Benzinga.com small-cap articles: http://www.benzinga.com/news/small-cap
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