Regional banks do not get much attention in the financial news. But when it comes to high-quality dividend stocks, what they lack in excitement, they more than make up for in consistency.
An example of this is Community Trust Bancorp (CTBI) , a regional bank with a long history of rewarding shareholders with dividend growth.
Community Trust has increased its dividend for 38 years in a row. It is a would-be Dividend Aristocrat, a group of stocks with 25+ consecutive years of dividend increases, but for the fact that the company is not in the S&P 500 Index.
In addition, Community Trust has a solid yield of 3.5%. The stock is reasonably valued, which makes it an attractive holding for value and income investors.
Bank on Consistent Profits
Community Trust Bancorp is a regional bank with nearly 80 branch locations in 35 counties in Kentucky, Tennessee, and West Virginia. It is the second-largest bank holding company in Kentucky and has a market cap of around $757 million. Community Trust operates with a $4.2 billion balance sheet. It engages in a wide range of banking activities, including taking deposits and making loans. It is also involved in commercial banking, and wealth management.
The operational strategy for many regional banks like Community Trust is to focus on a particular geographic region of the United States. By pursuing exceptionally close customer relationships, high-quality regional banks can build highly successful businesses, with strong profitability and growth. In mid-January, Community Trust reported its financial results for the fourth quarter of 2018. The bank marginally exceeded analysts' earnings-per-share estimates ($0.89 vs. $0.88). In the quarter, the bank grew both its loan portfolio and its net interest income by 3%, but non-interest income decreased by 1.4% from the previous year. Overall, EPS increased 6% over the same period in 2017. For full-year 2018, the bank grew its EPS by 15% to a record level thanks to growth in both interest and non- interest income.
Community Trust has many catalysts for future earnings growth. First, as a financial institution, it benefits most from steady economic growth. A stronger economy means more deposits and loans for the bank. It also results in fewer problem loans for a bank. For example, in the most recent quarter Community Trust's total nonperforming loans were $22.1 million, or 0.69% of total loans, compared to $28.3 million, or 0.91% of total loans, at the end of 2017. If the U.S. economy stays out of a deep recession, the company should continue to grow earnings.
In addition, higher interest rates would be a tailwind, as it would allow Community Trust to grow its interest income. Higher interest income was a contributor to growth last year. In the most recent quarter, Community Trust's net interest income of $36.3 million was an increase of 3.4%, from the prior year fourth quarter. Net interest margin, at 3.68%, was an increase of three basis points from the 2017 quarter. Lastly, Community Trust is a big beneficiary of tax reform, as was demonstrated last year. In 2018, Community Trust Bancorp's tax rate fell to 16%, from 25% previously.
An Exceptional Dividend Track Record
No company can raise its dividend for nearly four decades running, without durable competitive advantages and sustained growth over time. Community Trust possesses many of the qualities that make for a strong dividend stock. First, it has an above-average dividend yield. The broader S&P 500 Index, on average, yields roughly 2%. By comparison, Community Trust has a current yield of 3.5%, a significantly higher yield than the index. Not only that, but the company has a long history of increasing its dividend each year.
There is plenty of room for Community Trust Bancorp's dividend to continue growing in the years ahead. The company has a projected dividend payout ratio of 42% for 2019. A payout ratio less than 50% indicates a highly sustainable dividend, with enough room for annual hikes in the dividend payout. On July 24, 2018, Community Trust raised its dividend by 9%. Looking back further, the company has increased its dividend for 38 years in a row.
Community Trust is also attractive on a valuation basis. Shares of the company trade at a P/E ratio of 12, a reasonable valuation for a highly profitable and growing company. The stock appears cheap, based on its own historical average. In the past 10 years, the shares held an average P/E ratio above 13. As a result, returning to its historical fair value would boost shareholder returns by expanding the P/E multiple. The combination of multiple expansion, future EPS growth, and the 3.5% dividend yield could cumulatively result in strong returns moving forward.
There is nothing incredibly exciting about Community Trust Bancorp or its business model. The company simply takes in deposits and makes loans, in a fairly small region of the United States. However, its risk-averse nature provided the company with the ability to navigate economic downturns much better than many larger banks that had to severely cut their dividends during the Great Recession.
Community Trust has a secure dividend and a long history of steady growth. This makes it an attractive holding for dividend growth and value investors.
Nick McCullum is a regular contributor to Real Money. Click here to get columns like this each day from Jim Cramer, Stephen "Sarge" Guilfoyle, Helene Meisler and Jim "Rev Shark" DePorre.
(This article was originally sent to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Peter Tchir, Nick McCullum, Chris Versace and others.)