3 Reasons to Sell New York Community Bancorp

Last week I offered up three reasons why investors should consider picking up shares of regional lender New York Community Bancorp (NYSE: NYB  ) . But hang on just a second, there. As with any stock, it's far from a one-sided picture for NYB.

Today, let's take a look at a few reasons why NYB may not be such a hot stock.

1. The growth picture
One particularly attractive aspect of New York Community Bancorp's stock is its whopping 8.2% dividend yield. That's not a misprint, joke, or one-time special payout -- that's the $1-per-year that NYB has been paying out for roughly seven years.

The downside to that though is that while many banks grow though retaining some of their earnings and reinvesting them in new loans and branch growth, NYB is busy paying out substantially all of its earnings to shareholders through that hefty dividend. That means that organic growth isn't really part of NYB's game plan.

Observant investors may notice, though, that NYB's book value rose by 45% between 2006 and 2011. That's because management's focus is on growing the bank through targeted acquisitions. Most recently, the bank has been taking advantage of the fallout from the financial crisis and had made multiple Federal Deposit Insurance Corp. (FDIC)-backed acquisitions. In these savvy deals, NYB gets the deposit base of the acquired bank, but has a pledge from the FDIC to cover the majority of the losses from the bad loans on that bank's book.

The "but" in that strategy, though, is that since NYB doesn't keep dry powder around to make these acquisitions, it needs to raise money for them -- and that's typically through new share sales. This is tricky business, as ill-timed share sales can destroy shareholder value. And, in fact, if we look at the per-share book value of NYB between 2006 and 2011, it grew a scant 1.4%.

So there's a lot to like about an 8.2% dividend yield, but de minimis organic growth and a somewhat risky acquisition strategy may not sit well with some investors.

2. Loan-loss provisions
In the banking business, management doesn't just sit around and wait until loans completely crap out before recognizing their deterioration on the books. Instead, they estimate the likelihood that troubled loans will lead to losses and run that through the income statement.

While I'm all for a management team that's confident, I also like to see management err on the side of conservatism. According to S&P Capital IQ, KeyCorp (NYSE: KEY  ) , Regions Financial (NYSE: RF  ) , and Huntington Bancshares (Nasdaq: HBAN  ) all have an amount set aside to cover losses that's 100% or more of their nonperforming loans. Huntington's loan-loss provisions are nearly twice nonperforming loans.

New York Community Bancorp, however, only has loan-loss provisions equal to 26% of nonperforming loans. That's not exactly an apples-to-apples comparison with those other banks because of the FDIC-backed acquisitions that NYB made. However, even looking at just the non-FDIC-covered loans, NYB's loan-loss provisions still only cover about 45% of non-performing loans.

That could, of course, prove to be an accurate estimate on the actual losses on the loan book. Or it may prove an optimistic assessment, and if that's the case, the bank will have to increase provisions in the future, which will put a drag on earnings.

3. Better opportunities
There's an opportunity cost to investing in any stock. In exchange for the expected returns from the stock you're investing in, you give up the opportunity to earn more elsewhere.

Because the banking sector has been so beaten down and vilified following the financial crisis, basically every bank listed on U.S. exchanges trades at lower valuation multiples than it did back in 2005 and 2006. This is certainly the case with NYB. In 2006, the stock traded at 1.3 times the bank's book value. Today, it fetches slightly less than book value.

Should investor comfort in banks rebound, we could see NYB regain its valuation from six years ago. But, if that scenario does come to pass, there are bank stocks positioned to have much stronger rallies than NYB. KeyCorp had an average price-to-book of 1.9 in 2006, while today it's 0.7. Regions Financial's price-to-book fell from 1.5 in 2006 to 0.6 today. And at the mega-bank end of the market, Bank of America (NYSE: BAC  ) watched its multiple fall from 1.8 to 0.4 while JPMorgan Chase's slipped from 1.4 to 0.8.

In other words, investors looking for the biggest potential gains in the banking sector may prefer to look at more beaten-down names than NYB.

Even if not NYB, is banking where it's at?
Despite the concerns listed above, I think New York Community Bancorp is a good buy at today's prices, and I've backed up that view with an outperform call in my Motley Fool CAPS portfolio.

But even if New York Community Bancorp doesn't strike your fancy, you may not want to overlook the banking sector as a whole. Some of the best investors out there have taken an interest in the sector, and my fellow Fools examined why that is in a recent special report: "The Stocks Only the Smartest Investors Are Buying." You can grab a free copy by clicking here.

The Motley Fool owns shares of Bank of America, Huntington Bancshares, JPMorgan Chase, and KeyCorp. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 05, 2012, at 3:18 PM, parvez1 wrote:

    "Last week I offered up three reasons why investors should consider picking up shares of regional lender New York Community Bancorp (NYSE: NYB ) . But hang on just a second, there. As with any stock, it's far from a one-sided picture for NYB."

    Why did you not post the counter-argument in one article may I enquire?

  • Report this Comment On July 05, 2012, at 3:47 PM, TMFKopp wrote:

    @parvez1

    The combined length of the two articles would have been a bit much for one article. Plus the two are separated by just one click:

    http://www.fool.com/investing/general/2012/06/28/3-reasons-t...

    Hope this helps-

    Matt

  • Report this Comment On July 05, 2012, at 9:58 PM, neamakri wrote:

    (NYB) is the largest holding (about 1/4) in my only IRA account. That the price is down from what I paid makes me a little uneasy. However, every 3 months (NYB) sends me 25 cents per share into my account. Whoopee!

    They have paid dividends reliably for over 16 years, so I am keeping this holding long. I will have to trust that their recent acquisitions work out okay. Thank you very much for the article.

  • Report this Comment On July 09, 2012, at 12:52 PM, DirkHolthusen wrote:

    Did you put on a SHORT position after you recommended this stock (which I bought) and then issued this negative article? It's down 4% TODAY and I'm sure this litte ditty, didn't help the share price!

  • Report this Comment On July 09, 2012, at 1:52 PM, remmike wrote:

    Have you 'writers' ever listened to the Conf Calls from the very seasoned NYB management ? . ..They know far more about their business that the cub reporter here at Motley Fool. This is the most impressive team and leadership I listen to or the many stocks I own ....They know their game..Buy on the dips...

  • Report this Comment On July 09, 2012, at 8:04 PM, 1caflash wrote:

    I sold over 4,800 NYB shares July 9, 2012. I was trying to go long-term with it, but I will eventually use part of the cash to prudently invest in other stocks. I got tired of trying to defend it. It might be interesting for folks to see some of my purchases since April 2012; remember, I am an old guy. GAINP-2,000 shares at $25.04 p/s; RSO-A-2,000 shares at $24.30 p/s, and MAIN-1,600 shares- average price $23.46 p/s. Prices do not include brokerage fees or taxes. Also, I sold NS and had a small profit. I have no MLP's in my more liquid account and only 10 stocks plus cash. My seven other stocks are ARCC, CVX, HTCO, PETS, RMCF, SLP, and WM. Matt, thanks for your input, but the Credit Suisse and other recent downgrades convinced me that I can do better. This might be another egg-in-my-face move, but as you can see in this environment, I like BDC's. Although RSO is a REIT, its recent offering looks good, especially since I believe interest rates probably will not be significantly higher, even by 2017.

  • Report this Comment On July 11, 2012, at 4:39 PM, 1caflash wrote:

    Darn, maybe I shouldn't have sold the NYB shares. Have no fear. Did you see what happened to Prospect Capital? Eventually came July 11, 2012. As documented on my Seeking Alpha posts, I bought 3,000 PSEC shares. My average price per share is about $11.05. This company pays monthly and has been raising its dividends. I will be eligible for the August and September 2012 payouts, which will be in my DRIP when the first dividend enters my account. The future is looking bright; hand me those shades!!

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