First of Long Island Is a High-Yield Hidden Gem

When it comes to investing in stocks, some investors will focus on the largest companies. This is understandable, as it is natural to hone in on the companies we are familiar with and whose products we interact with on a regular basis. This is why investors usually flock to large-cap stocks for dividends. And while stocks with market caps above $10 billion are certainly worthy of consideration, investors should not be too quick to dismiss small-cap dividend payers either. For example, First of Long Island Corporation is a small-cap bank stock with a market cap just below $500 million. While investors looking at bank stocks might immediately select the banking giants such as JPMorgan Chase or Wells Fargo , First of Long Island could be an even better pick for income investors due to its high dividend yield above 4%. First of Long Island stock is small in size, but its dividend yield towers above many of its larger peers in the banking industry. It also has performed well in recessions and possesses a long history of steady dividend growth. Business Overview The First of Long Island Corporation is the holding company for The First National Bank of Long Island, a small-sized bank that provides a range of financial services to consumers and small to medium-sized businesses. Its offerings include business loans, consumer loans, mortgages, savings accounts, and more. FLIC operates around 50 branches in two Long Island counties and several NYC burrows, including Queens, Brooklyn, and Manhattan. First of Long Island has performed uniquely well within the broader financial sector, even with two massive headwinds. First, the coronavirus pandemic has had a negative impact on the financial sector by sending the U.S. economy into recession. Second, banks have had to grapple with interest rates near zero, which has reduced banks' net interest margin. But despite these challenges, FLIC has reported excellent operating results in recent periods. In the most recent quarter, FLIC grew revenue by 13% from the same quarter last year. FLIC easily beat the consensus estimate, as analysts had forecasted a mid-single-digit growth rate. FLIC's revenue growth was possible thanks to an expansion of its net interest margin, by 10 basis points year over year, in combination with an overall larger loan book. FLIC also benefited from being a member in the PPP program during the third quarter. FLIC's earnings per share totaled $0.45 during the third quarter, up 2% year over year. Results beat estimates marginally, as analysts had forecasted EPS of $0.44 for the quarter. FLIC's earnings growth was possible thanks to a decline in its average share count compared to the previous year's period, as net income on a company-wide basis remained unchanged from the previous year's quarter, at $10.8 million. The company's continued revenue and EPS growth allows it to continue to reward shareholders with increased dividends year after year, regardless of the economic climate. Bank On Reliable Dividends First of Long Island is a surprisingly impressive dividend growth company. This is because small-cap stocks typically do not pay high dividend payouts to shareholders, if they pay dividends at all. In many cases, small companies are not at the point of maturity where they are generating steady, positive earnings each year. This prevents many smaller companies from paying dividends, even if their management teams wanted to. But First of Long Island has raised its dividend for 25 consecutive years, including a 5.5% increase in September 2020. If First of Long Island were a member of the S&P 500 Index with a larger market cap, it would qualify as a Dividend Aristocrat based on its length of annual dividend increases. Investors can be reasonably confident that this well-run bank will continue to increase dividends going forward. The fact that the company managed a 5.5% raise in 2020, amid a very difficult economic backdrop, speaks very highly to the strength of the business. The First of Long Island has generated solid EPS growth of 5% annually from 2010 to 2019. In turn, FLIC's dividend has grown at a 10-year average rate of slightly more than 7%. FLIC's EPS growth in the past was mainly possible thanks to a solid pace of business growth. FLIC's revenues roughly doubled over the last decade, as the bank was able to expand its presence in its markets while also generating higher revenues per branch during that time frame. More recently, FLIC has started to buy back shares, which has also been beneficial for EPS growth in recent quarters. Attractive Total Return Potential The combination of dividends (currently yielding 4.1%) and future EPS growth (expected at roughly 5% per year) will provide satisfactory returns for shareholders moving forward. In addition, the stock appears to be undervalued, trading for a price-to-earnings ratio just above 10. An expanding valuation to a P/E multiple of 13, for example, would further add to shareholder returns. Overall, it is not unreasonable to assume double-digit annualized returns from here for FLIC stock, which shows the benefit of buying high-quality stocks with high dividend yields and low valuations. At a payout ratio of less than 50%, the dividend still looks quite safe. FLIC is a small regional bank that is focused on Long Island and some boroughs of New York City. As such, it has benefited from a growing population and strong housing market in the areas it is active in. It appears that FLIC has a competitive advantage in terms of being focused on an attractive geographical market. FLIC has solid fundamentals, including an above-average return on equity of ~11% and strong loan stability, with below-average credit charge-offs. Final Thoughts The First of Long Island is not a large bank, but it is active in an attractive regional market and operates profitably. FLIC has not been a high-growth business in the past, but through a combination of dividends and earnings growth, returns have still been very solid. Based on double-digit estimated annual returns moving forward, in conjunction with a yield above 4%, FLIC seems like an attractive stock for income investors.

First of Long Island Is a High-Yield Hidden Gem

Investors should not be too quick to dismiss small-cap dividend payers.

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