Cleveland Rocks: This Regional Bank Stock Offers a 4%+Yield and Growth

Investors looking at the financial sector for dividend stocks will likely focus on the big banks such as JPMorgan Chase , Bank of America and Citigroup . This is understandable, as the big banks get most of the attention in the financial news, and have large market capitalizations above $100 billion. But income investors should also consider high-quality regional banks such as KeyCorp . KeyCorp has a market cap of $18 billion, which is fairly small in relation to the major U.S. banks. However, KeyCorp has a stable business with growth potential. And KeyCorp stock has a dividend yield above 4%, which is a much higher payout than JPMorgan Chase, Bank of America, or Citigroup -- and double the yield of the broader S&P 500 Index at a reasonable valuation. Why Regional Banks? Whereas the big U.S. banks operate global businesses and have a presence in virtually every aspect of financial services, regional banks are focused on a particular region of the United States. And while this may seem like a disadvantage, it allows regional banks to focus on their core competencies. Plus, regional banks such as KeyCorp do not engage in many of the riskier aspects of financial services, such as trading, that nearly brought the biggest U.S. banks to the brink of insolvency during the Great Recession of 2008. Headquartered in Cleveland, Ohio, KeyCorp has been in business for 190 years and is now one of the nation's largest bank-based financial services companies with almost $147 billion in assets. The company operates in 15 states with over 1,400 ATMs and 1,100 full-service branches. KeyCorp works in personal, small business, commercial, and corporate banking along with wealth management. KeyCorp has a leading position across the categories in which it operates. This has provided it with consistent growth since the Great Recession ended. Since 2011, earnings per share increased by over 9% annually. Growth was due to revenue growth, share repurchases, and tax reform. Meanwhile, its dividend has grown much faster in recent years. For example, in 2018 KeyCorp raised its dividend by 62% on a year-over-year basis. KeyCorp, like a bevy of other banks, has the possibility for growth in the years ahead stemming from a variety of industry tailwinds. General economic growth, the potential for higher rates over the long-term, and an improved balance sheet sets the company up well. And since it is still on the smaller side within the financial services sector, it has plenty of room to grow. Growth at a Reasonable Price On October 17, KeyCorp reported quarterly results for its third fiscal quarter. For the quarter, income from continuing operations came in at $383 million, representing a 5.0% decline from the previous quarter. Adjusted EPS would have been $0.48, excluding a previously disclosed fraud loss. On an adjusted basis, EPS increased 6.7% for the quarter, another quarter of steady earnings growth. Return on assets fell to 1.14% from 1.40% a year ago, Common Equity Tier 1 ratio dropped to 9.52% from 9.95% and the net interest margin declining 18 basis points to 3.00%. These declines reflect the falling interest rate environment, which is broadly negative for bank profitability as lower rates reduce net interest income. That said, book value per share increased significantly to $15.44 from $13.33. KeyCorp also saw growth in its two core business lines. Consumer Bank revenue from continuing operations increased 1% from the same quarter last year, while Commercial Bank revenue from continuing operations rose 2.5% year over year. Moreover, thanks to the company's solid EPS growth and low payout ratio, KeyCorp continues to increase its dividend, even in a challenging operating climate. Bank on a Competitive Dividend Payout In the third quarter KeyCorp increased its dividend 9% from $0.17 to $0.185 per share from $0.17. The company also completed $248 million of share repurchases as part of a plan to buy back up to $1 billion worth of stock in the next four quarters. KeyCorp's strong profitability allows it to return cash to shareholders through stock buybacks and dividends. KeyCorp currently pays an annualized dividend payout of $0.74 per share. At the same time, the company is expected to generate EPS of $1.75 for 2019. With a projected dividend payout ratio of 42% for the current fiscal year, KeyCorp has a secure dividend in all but the most severe economic downturns. There should also be room for continued dividend hikes each year going forward. KeyCorp is also trading for a reasonable valuation. Bank valuations have expanded across the sector as share prices rise amid flat earnings. However, regional banks are widely cheaper than the big U.S. banks, adding another advantage for investors in addition to their higher yields. For example, KeyCorp stock trades for a price-to-earnings ratio of about 10.4, a very modest valuation. KeyCorp is not overvalued, considering the company is growing earnings, and could actually be undervalued given its high-quality business model. Final Thoughts High-yield stocks often carry excessive risks. With the S&P 500 Index yielding just 2%, investors have to look harder for decent levels of income in the stock market. KeyCorp has a 4% dividend yield, which is very attractive in a falling interest rate environment. KeyCorp also provides dividend growth, thanks to its strong profitability and steady growth over the years. Lastly, the bank's low valuation makes KeyCorp an attractive stock for value and income investors. (JPMorgan and Citigroup are holdings in Jim Cramer's Action Alerts PLUS member club. 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Cleveland Rocks: This Regional Bank Stock Offers a 4%+Yield and Growth

The big banks get most of the attention, but income investors should also consider high-quality regionals.

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