3 bank stocks with steady dividends

Despite recent gains, Capital Federal Financial, United Bankshares and New York Community Bancorp remain good long-term plays.

By TheStreet Staff Apr 5, 2010 11:16AM

By Philip van Doorn, TheStreet TheStreet.com


We highlighted three bank stocks in November that offered strong dividends and stable performance. Despite recent gains among bank stocks, these companies remain good long-term plays.


Capital Federal Financial (CFFN), United Bankshares (UBSI) and New York Community Bancorp (NYB) have climbed at least 14% this year, outperforming the 11% advance of the S&P 500 Financial Sector Index.


Bank stocks have doubled the performance of the broader market this year as companies such as Wells Fargo and JPMorgan Chase return to growth. These smaller rivals offer better-than-average credit quality and steady earnings.


Capitol Federal Financial


Shares of Capital Federal have increased 20% this year. The Topeka, Kan., thrift is organized as a mutual holding company, with only 29% of its shares held by the public. These shares are known as "public shares," while the remaining common shares are controlled by the mutual holding company. The mutual holding company generally waives its dividends, only collecting payments when they're needed to cover operating expenses.


Capital Federal boosted its fiscal first-quarter earnings 32% to $21 million, or 99 cents per public share, its best quarterly performance during 2009. Dividends paid out during the fourth quarter totaled 79 cents a share, including a 29-cent special dividend.


Its main subsidiary, Capital Federal Savings Bank, is strongly capitalized, with a tier 1 leverage ratio of 10% and a total risk-based capital ratio of 24%. Capital ratios rose slightly during the fourth quarter, in line with a small decline in total assets, as Capital Federal lowered its interest rate risk by exchanging $194 million in fixed-rate mortgages with Freddie Mac (FRE) for mortgage-backed securities, which the thrift sold for a $6.5 million gain.


Asset quality has remained strong, as nonperforming assets -- including loans whose payments are more than 90-days overdue and repossessed real estate -- comprised 0.4% of total assets as of Dec. 31. This compares with 3.3% industrywide, according to the Federal Deposit Insurance Corp.


Based on its regular quarterly dividend of 50 cents, Capitol Federal's shares yield 5.3% and are trading at 9.1 times its earnings. The public shares were trading for 2.9 times tangible book value, according to SNL Financial.


In a report supporting his firm's initial "overweight" rating on the shares, Barclays Capital analyst Bruce Harting touted Capitol Federal's "best-in-class credit quality," stable deposit base and nine-year average dividend yield of more than 6%.


While Capital Federal shares might be less attractive to new investors after their recent run-up, they remain a good conservative long-term dividend play. 


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United Bankshares


United Bankshares has seen its shares jump 30% this year. With the shares now close to their 52-week high, the dividend yield has declined from 6.8% in November to 4.6%, which is still a decent yield. The quarterly payout is 30 cents a share. Fourth-quarter earnings were $17.4 million, or 40 cents, up 5% from a year earlier and 44% from the third quarter.


United's loan quality is stable, with a nonperforming assets ratio of 1.4% as of Dec. 31 and a ratio of net charge-offs to average loans of 0.7% for 2009, which compared to 2.5% for the industry, according to the FDIC.


The shares appear expensive at $26.80, which is 17 times 2009 earnings and 2.6 times tangible book value. However, if economic improvement brings earnings per share up from $1.55 in 2009 to a more normalized range of $2 to $2.30, the shares could hit $30.


United has weathered the storm, but it's a volatile play that's best for long-term investors.


New York Community Bancorp


Shares of New York Community Bancorp have returned almost 15% this year. The company has benefited from its Dec. 4 acquisition of the failed bank AmTrust. Last month, the company bought the failed Desert Hills Bank of Phoenix, which had $497 million in total assets.


In a recent report supporting a "neutral" rating of New York Community's shares, Bank of America (BAC) Merrill Lynch analyst Kenneth Bruce said the company was "looking fully valued" based on earnings estimates, although the dividend yield of 6% remained attractive.


New York Community shares are trading for 13.3 times Bruce's 2010 earnings-per-share estimate of $1.25, and 2.5 times tangible book value. Both P/E and price-to-tangible book ratios were considerably higher from 2005 through 2007, before the credit crisis hit.


The bank has taken major steps to increase its core deposit base, allowing it to move away from wholesale funding. Low short-term interest rates have helped the company has improve its net interest margin, the difference between the average rate earned on loans and securities investments and the average cost of funds.


The bank has excess capital from last year's secondary offering, enabling it to expand its deposit base through juicy FDIC-assisted acquisitions. The company specializes in multifamily mortgages in New York that are secured by buildings with mainly rent-stabilized or rent-controlled apartments. These buildings tend to have steady cash flows.


Despite the run-up in the shares, New York Community Bank remains a compelling long-term investment.


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