Some banks have run into major trouble over the last couple of months, with a couple of them being forced to close down or being acquired at very low prices, such as Credit Suisse (CS) in Switzerland. However, not all banks are troubled.
In fact, some banks are doing quite well in the current environment, as rising interest rates allow some banks to expand their net interest margins, which boosts profitability.
On top of that, valuations are rather low, and thanks to above-average dividend yields, select banks can be compelling investments at current prices.
We will showcase three bank stocks here that are attractive today and that offer reliable dividends for income investors.
The Cincinnati Kid
Fifth Third Bancorp (FITB) owns and operates banks in 12 midwestern states in the US, with Georgia, Florida, and Michigan being among its biggest markets.
This regional name is not among the largest banks in the country, but it has a compelling track record when it comes to dividend payments and business growth on a company-wide basis, and, importantly, also when it comes to generating earnings-per-share growth.
Over the last decade, Fifth Third Bancorp has grown its EPS by around 70%, and its dividend rose by more than 150% over the same time frame. The most recent dividend increase was announced in late 2022, and Fifth Third has now increased its dividend for 12 years in a row.
The bank's dividend payout ratio, based on current profit estimates for this year, is just 38%. While this is up from a decade ago (since Fifth Third has increased its dividend faster than its per-share profits), the dividend payout ratio is far from demanding. We believe that the dividend is relatively safe.
At current prices, the dividend yield is 4.7%, which is at the upper end of the historical range. Over the last decade, the dividend yield was mostly around 3%, thus investors get a significantly higher starting dividend yield today, relative to what is normal for Fifth Third Bancorp's stock.
Today, Fifth Third Bancorp is valued at just 7.8x this year's expected net profits. This is below the normal or average valuation we have seen over the last decade, which is why we believe that there could be significant multiple expansion tailwinds over the coming years.
Between the high starting dividend yield, some dividend and EPS growth, and some multiple expansion tailwinds, Fifth Third Bancorp could deliver double-digit annual total returns going forward.
A Regional Bank 'Outlier'
Cambridge Bancorp (CATC) is a regional bank with a rather small market capitalization, at just $450 million. Cambridge Bancorp offers commercial and consumer banking services to customers in Massachusetts and New Hampshire. The bank has a history dating back to the late 19th century.
Cambridge Bancorp has a strong dividend growth track record, having increased its payout for 24 years in a row. That makes the company an outlier in its industry, as most banks either reduced, maintained, or eliminated their dividends during the Great Recession. Only very few banks managed to increase their payouts during that time.
The strong dividend track record, with growth even in tough years, already suggests that the dividend cut risk is low. This is further underlined by the fact that Cambridge Bancorp's dividend payout ratio is just 35%.
Over the last decade, the dividend payout ratio has declined (the dividend grew at a slower rate than the bank's per-share profits), meaning the dividend got safer over time. While the dividend cut risk never is zero, it seems pretty low at Cambridge Bancorp.
With a dividend yield of 4.5%, Cambridge Bancorp offers substantial income for its shareholders. At current prices, shares are valued at 11.7x net profits. This isn't especially low compared to how many other banks are valued, but the strong track record could justify Cambridge Bancorp's current valuation.
Earnings are expected to grow meaningfully in the coming years, which should allow the bank to grow its dividend easily. In combination with a nice starting dividend yield, total returns could be attractive.
A 'Texas-Sized' Yield
Southside Bancshares, Inc. (SBSI) is a Texas-based bank with a market capitalization of around $1.0 billion. The bank's history dates back a little more than 60 years, to 1960.
Southside Bancshares has, like Cambridge Bancorp, increased its dividend throughout the Great Recession, making it another rare bank with a dividend growth track record of more than 20 years. In fact, Southside Bancshares increased its dividend for 29 years in a row already.
The dividend has not only been grown for a long period of time, but dividend growth has also been attractive from a growth rate perspective. Over the last decade, the dividend has grown at a little more than 7% per year, easily outpacing the rate of inflation over the same time frame.
Today, with Southside Bancshares trading at $29 per share, the dividend yield stands at 4.8%, making Southside Bancshares the highest-yielding company of the three discussed here. With a dividend yield of close to 5%, Southside Bancshares' income potential is pretty appealing.
Looking at the safety of Southside Bancshares' dividend, we see that the payout is 47%. That's higher compared to Fifth Third Bancorp and Cambridge Bancorp, but we still believe that the dividend cut risk isn't high.
At a little less than half of its profits, the dividend is well-covered, and the strong dividend growth track record that has proven the bank's ability to maintain and even increase the payout during tough times eases fears as well.
A dividend cut can't be ruled out, of course, but we believe that investors have little to worry about when investing their money in Southside Bancshares.
At 10x net profits, Southside Bancshares trades at an undemanding valuation, although it isn't as cheap as Fifth Third Bancorp and some other banks. Still, considering that Southside Bancshares has been valued at 12-16x net profits for much of the last decade, one can argue that shares are undervalued today.
Between the nice starting dividend yield, solid expected EPS growth, and some potential for multiple expansion, the total return outlook is appealing.
