Buy This Stock Before It Becomes a Dividend Aristocrat

The nearly $16 billion-asset Eastern Bankshares (EBC 3.14%), which went public last October, recently launched its first quarterly dividend of $0.06 per share, which it expects to issue regularly.

While it might appear small right now, given what similar banks have done, Eastern's dividend could certainly grow into something significant as the bank becomes more profitable. It could perhaps even become a Dividend Aristocrat, given enough time and consistent earnings performance.

Let's take a look at what leads me to that assertion.

Looking at peers

A $0.06-per-share quarterly dividend gives Eastern an annual dividend yield of roughly 1.5%, with shares currently trading around $16.10 per share. Before going public, Eastern Bank was a mutual bank, meaning it is technically owned by its depositors. To make a fair comparison, we should look at competitor banks as well as other mutual banks in the area to see what kind of dividends similar banks pay out.

Source: Bank earnings materials. *Dividend yield based on share prices on 2/1/21.

In terms of similarly sized banks that operate directly in Eastern's footprint such as Meridian, Brookline, Independent, and Berkshire Hills, most pay a dividend yield right now of more than 2%, with a few close to 3% or higher. However, share prices at a lot of these banks are currently down from where they were prior to the pandemic, so the dividend yield could be slightly elevated from normal levels.

The $63 billion-asset People's United and $56 billion-asset New York Community Bancorp are more representative of mutual banks that demutualized and grew into regional banks in the Northeast. Both pay a very high dividend yield. Eastern could be headed in a similar direction, because Eastern's CEO, Bob Rivers, has indicated he thinks the bank will grow to around $40 billion in assets over the next decade. 

Although Eastern's dividend just launched, an analyst on Eastern's first-ever earnings call asked management if they would consider increasing the dividend on a semiannual basis, given the bank's strong capital position following its $1.8 billion initial public offering. Eastern's CFO, Jim Fitzgerald, did not indicate one way or the other, but the fact that an analyst asked the question shows it's at least a possibility.

Good time to get in

It's a good sign to see Eastern establishing the dividend so early into its public life, and it will be a part of the capital return plan for shareholders. Given what competitors and other similar banks have done, there is a very good chance Eastern's dividend will continue to grow and turn into a more solid dividend yield or even lead to the company reaching Dividend Aristocrat status down the road. There are still several steps Eastern needs to take (including joining the S&P 500 index) before it earns such a lofty designation, but the banking operation has already taken the first big step.

With that in mind, now may be a very good time to get in on this stock. Because this is a mutual bank that recently went public, regulators will not allow Eastern to begin repurchasing shares until it has been public for at least a year. But investors should expect that Eastern will announce a stock buyback program toward the end of this year. Eastern is also a solid bank in terms of its fundamentals, and it is currently trading slightly below tangible book value, making now an opportune time to buy.