Weathering the Storm With a Safe 4.5% Dividend Yield

Financial institutions and banks in particular have had a tough go of things in the last year. The Covid-19 pandemic resulted in significant credit provisions and called into question the availability of liquidity. Moreover, lower interest rates have squeezed lending margins and could very well be around for some time. Still, banks are in much better shape today and often offer a well above average dividend yield. Some companies in the broader financial sector offer particularly high dividend yields that are especially attractive to income investors, in an environment of historically low interest rates. A company such as Comerica fits this description. Comerica, like the rest of the financial sector, endured a difficult year due to the coronavirus pandemic. But the company has maintained profitability and its dividend, currently yielding 4.5%, makes the stock appealing for income investors. Business Overview Headquartered in Dallas, Texas, Comerica is a financial services company operating in three segments: the Commercial Bank, the Retail Bank, and Wealth Management. In addition to Texas, Comerica also does business in Arizona, California, Florida, and Michigan, serving seven of the 10 largest cities in the U.S. At the end of 2020 the company operated 433 banking centers and held $85.3 billion in assets. The $8.5 billion market cap firm employs nearly 7,700 people. On Jan. 19, 2021 Comerica reported fourth-quarter 2020 results for the period ending Dec. 31, 2020. For the quarter, net interest income totaled $469 million, up 2.4% compared to Q3 2020, but down 13.8% compared to Q4 2019. Non-interest income equaled $265 million, up 5.2% compared to Q3 2020, but down slightly from the year-earlier period. Comerica generated $215 million in net income, up from $211 million last quarter, but down from $269 million in Q4 2019. Earnings per share equaled $1.49 versus $1.44 last quarter and $1.85 in Q4 2019. 2020 was a year of challenges for Comerica, but the company held steady overall. For the year, Comerica generated $1.911 billion in net interest income, an 18.3% year-over-year decline, while non-interest income equaled $1.001 billion, just a 0.9% decline. Net income totaled $474 million for 2020, compared to $1.198 billion in 2019, while EPS equaled $3.27 versus $7.87 in 2019. This result was driven by meaningful pressures in 2020, including significant credit provisions and declining yields. For the year the company's net interest margin and Tier 1 Common Equity ratios were 2.54% and 10.35% compared to 3.54% and 10.13% in 2019. For 2021 we are forecasting $4.50 in EPS, which represents some sort of recovery, but it is still well below the $7+ in EPS that Comerica was earning in 2018 and 2019. This view could be too cautious, but we consider it prudent for now considering the uncertainty related to the pandemic. Growth Prospects Prior to the Great Recession, Comerica was cruising along with EPS reaching $5 in 2005. In addition, the company's dividend hit $2.64 on an annualized basis in 2008. Once the financial crisis came, these numbers quickly changed. The company lost money in 2009 and dilutive action was required, as the share count increased by 30% in two years (partly due to the 2011 acquisition of Sterling Bancshares). Moreover, the dividend was slashed first in half and then to $0.05 per quarter and is just now reaching its pre-recession peak. It's been a long road, but after a decade Comerica finally got back to where it was. In the 2011 to 2017 stretch EPS grew by an annual rate near 15%. In 2018, the 50%+ increase in per-share results was aided by tax reform. In 2019 company-wide performance was actually negative, but the lower share count buoyed the bottom line. More recently, Comerica is facing short-term pressure related to very low interest rates and credit provision requirements for the Covid-19 crisis. The significant reduction in 2020 earnings demonstrates the difficult operating environment. Comerica's business model has been under pressure lately as its adjustable-rate loans have been impacted by historically low interest rates. Moreover, the Covid-19 crisis has required substantial credit provisions, which may continue to be a headwind. During the last recession Comerica posted EPS of $4.43, $1.29, -$0.80, $0.78 and $2.09 in the 2007 through 2011 stretch, while the dividend was cut from a high of $2.64 down to $0.20. This type of risk should be kept in mind. Still, we are encouraged on a number of fronts. Today Comerica is in much better financial shape. Furthermore, the dividend payout ratio was around a third of earnings prior to 2020 and we expect the payout to remain manageable in the intermediate term. Moreover, there is the opportunity for additional returns in the way of share repurchases over time. Overall, we expect cautious improvement to continue from here. Dividend Analysis As noted above, if Comerica were to grow by 7% annually coming off a subdued $4.50 in expected EPS this year, that would imply the potential for ~$6.31 in EPS after five years. Comerica might not be the most exciting growth stock, but it is an attractive stock for income due to the high dividend yield of 4.5%. After dividend cut during the last recession, the cash payment was reset to around 20% of earnings in 2011. This has since climbed to 60% or so, based on a $0.68 quarterly dividend -- $2.72 on an annual basis -- and ~$4.50 in expected earnings. Comerica has exhibited strong dividend growth in the past decade. Importantly, this dividend growth could continue as the company is expected to generate positive EPS growth. And, the 2020 projected dividend payout ratio of 60% demonstrates sufficient dividend safety with room for continued raises, an important consideration for income investors. Final Thoughts Comerica had a particularly tough time during the last recession, posting negative earnings and cutting its dividend materially. However, in the decade since it got back on track and was performing well. Last year proved to be another difficult period, but Comerica was able to withstand this crisis much better. Earnings still dipped, but the dividend remain covered and was held steady. Comerica stock has a 4.5% dividend yield, a reasonable valuation and the potential for outsized growth should conditions normalize. Therefore, Comerica offers an opportunity to weather the storm with a solid income stream.

Weathering the Storm With a Safe 4.5% Dividend Yield

This regional financial name is appealing choice for income investors.

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