Long Shot: A Hidden Gem Among Banks

 | May 31, 2012 | 3:30 PM EDT
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I recently had a discussion with a fellow investor who pointed out that some investors were either not in a position or of the temperament to wait for the market to fall into a depressed state before putting money to work. Some income oriented investors in particular may need the income now, so they may have to commit the unforgivable sin of spending capital if they are forced to wait for a better entry point. Even when this is this case, you should not abandon sound principles. I want to maintain some measure of long-term safety while collecting my dividends and I also want the prospect of inflation-beating performance. I want companies in this "buy it now" portfolio that have sound fundamentals and the prospect of future dividend increases.

I ran a basic screen looking for stocks that paid at least 3% in annualized dividends and had a solid history of dividend growth. As a measure of financial strength and potential for appreciation, I used the Piotroksi F score. (I have found this measure to be one of the best indicators of financial and operating improvement and companies with the two highest rankings would seem to offer a certain amount of financial safety.) This simple screen turned up some stocks that income investors could buy and sleep at night while collecting their dividends. Although they will still get hit in a broad market decline, history shows us that these types of stocks continue to pay generous dividends and rebound quickly when the market recovers.

First up, is Reynolds American (RAI). Although tobacco stocks are widely hated by many investors, this company has more than doubled its dividend over the past decade and scored a solid 8 on the F-score scale. The two highest ranked stocks are mutual fund provider Waddell and Reed (WDR) and Akzo Noble (AKZOY), the Dutch paint and chemical company. Both have F-scores of 9 and respectable dividend yields.

But the hidden gem I uncovered is a bank in Ohio that has a very high F-score of 8 and pays a generous 6.5% dividend. United Bancorp (UBCP) is a small-capitalization bank located in Martins Ferry. The company has 20 banking offices and is located right along the borders of West Virginia and Pennsylvania. More importantly, from an investors point of view, it is right smack in the middle of the Marcellus and Utica oils shale fields.

Although the shares trade at a slight premium to book value, this is a close to a perfect little bank as you may ever find. Its nonperforming assets are just 1.52% of its total assets. Its loan loss reserves are 90% of its potential exposure. It has maintained adequate capital even while paying a substantial dividend. The dividend today is 60% higher than it was a decade ago. Insiders own 20% of the bank and have a strong incentive to see it and its stock price grow. This careful stewardship has paid off as the bank has not had a loss in the past five years -- despite the difficult operating conditions for small banks.

Before putting money to work, I plan to wait until Mr. Market is in a highly depressed phase. But if you have to get money to work now, a focus on dividends, sound balance sheets and superior prospects is the best way to select a portfolio. This screen can help you find the type of gems that will enable you to get paid now and reduce risk.

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