Is New York Community Bancorp, Inc.'s High Dividend Sustainable?

As my Foolish colleague John Maxfield opined recently, New York Community Bancorp (NYSE: NYCB  ) is an unheralded jewel in the financial sector. Boasting some of the best financial metrics in the industry, the company also has a fat dividend yield that is nearly three times the average of dividend-paying Dow Jones Industrial index stocks.

But the lender's payout rate (the percentage of earnings it hands out as dividends) is sky-high. Here's a look at whether the bank can maintain it, or if it'll have to cut that number down to a more manageable size.

Full coffers
New York Community Bancorp's numbers are almost frightfully good. In Q1, the bank netted a profit of $115 million on total income of $313 million, for a wide margin of almost 37%. That was miles ahead of giant rivals JPMorgan Chase (NYSE: JPM  ) , at 22%, and Wells Fargo (NYSE: WFC  ) , clocking in at 29% in its record-breaking Q1.

Additionally, even during tough times for the financial industry the company has loaned its money wisely. In the dark days of last decade's financial crisis, its charge-off ratio (the non-performing loans the bank writes off compared to its total loans) stood at a mere 0.5%.

That was a number that most rivals could only envy. Bank of America (NYSE: BAC  ) charge-off ratio around that time was 4.7%, while US Bancorp (NYSE: USB  ) -- a regional lender not unlike New York Community Bancorp -- posted a 2.5% figure in Q1 2010.

Their profit is your profit
This impressive financial strength gives New York Community Bancorp the power to pay out a common stock dividend that exists only in the fantasies of other lenders. This distribution has stayed remarkably steady over the years -- yes, even through the crisis -- at $0.25 per share. 

That means a yield of 6.5% on the current stock price, crushing into the 2.9% yield of JPMorgan Chase, U.S. Bancorp's 2.2%, the 2.8% paid by Wells Fargo,  and the 2.2% of the Dow Jones Industrial Average.

New York Community Bancorp boasts this impressive number because it resolutely hands out nearly everything it makes in dividends. In Q1, the total payout was $110.5 million, or 96% of net profit. 

The concern, of course, is that with a rate close to 100% the company will sooner or later have to slice its payout. After all, it's bound to have a lousy quarter, right?

Except that in its recent history, it hasn't.  The bank's revenue and bottom line have stayed remarkably steady over the past few quarters and years. This gives it the confidence to maintain that high distribution, as it's more than likely at least something will be left for the company's investments -- or for rainy-day money -- after those dividends are paid.

That something has a way of adding up; New York Community Bank doesn't mind opening its wallet for capital expenditures, but it can stuff the cash away when necessary. As a result, it's able to cover that high dividend, even during challenging times like the financial crisis. As you can see in the chart below, the company managed to sail through that period, despite a payout ratio that briefly spiked to over 750%.

NYCB Payout Ratio (TTM) Chart

Rolling quarters
Dividend policies are not carved in stone. Even the most apparently solid ones are subject to revision when a company suffers a downturn, whether temporary or prolonged. But considering how New York Community Bank runs its business and manages its money, its justifiably beloved $0.25 payout looks as safe and sustainable as any on the market these days.

That dividend has been paid every quarter stretching back nearly ten years.  Don't be surprised if it keeps flowing for many more.

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  • Report this Comment On June 04, 2014, at 9:32 PM, david4801 wrote:

    But isn't the issue that when it reaches that magic number it will become a 'big' bank and that high payout ratio won't be allowed any longer??

  • Report this Comment On June 06, 2014, at 3:24 AM, TMFVolkman wrote:

    david4801, I'm assuming that by "magic number" you mean $50 billion in assets, at which point the bank would be obligated to submit to the Fed's Comprehensive Capital Analysis and Review. Under CCAR, the Fed frowns on what it considers to be excessive dividend payouts, and at present NYCB's would certainly qualify.

    Keep in mind, though, that likely the only way the bank is going to jump to that level quickly is through an acquisition. Yes, it's signaled that it's in the market for a buy, but talk is cheap and so far that's been the only currency. Also, they're after a big asset buy - firstly, that takes time and secondly, such a purchase could very well add enough financial firepower to keep that current $0.25 dividend going (even if the payout ratio drops significantly below the present level).

    My feeling about this bank is that it considers its dividend to be very, very important. So if I were a betting man, I'd put money on NYCB trying its level best to keep it steady as long as possible.

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