With a minuscule 0.13% dividend yield, Live Oak Bancshares (LOB 1.01%) currently isn't much of an income stock. However, if the company's growth trajectory continues, that could certainly change. In this Fool Live video clip, recorded on Oct. 25, Fool.com contributors Jason Hall and Matt Frankel discuss why Live Oak could be a smart stock to put on your radar.
Jason Hall: Live Oak Bank shares is really interesting. This is a bank that's based in North Carolina, but they're national, they're really diversified across the U.S. What Live Oak Bank shares is really try to do and has done really well, is to identify vertical markets, different business markets, different types of industries where there's opportunity. We're lending growth is going to grow. The economics makes sense in terms of lower-risk. Thinking about it's risk-adjusted potential to get returns with good tailwinds to continue bank well in those areas. Then it learns about them, it learns about the industry.
A lot of times it actually brings experts in those fields in to help them build out their business, and then it focuses on building out its lending in those areas. It's worked quite well if you look at its earnings growth. I'm going to share something that actually talks about those verticals. What you see on the left here, the dark purple in the middle. The dark purple in the middle are verticals that the company started lending to in 2018 or after. The lighter purple are verticals that it started from 2008 from its founding through 2017. Those are the verticals that it started.
As you move forward from the second quarter of 2019 to the second quarter a year ago; to the second quarter of 2021, you can see that those newer verticals are becoming a bigger and more important part of its business. It actually shows right here in the second quarter that was just ended. It had more originations in those newer lines that it's only been going after and the past three years than it did in the verticals that it's been going after for more than a decade. It's clearly working.
Now, one other thing that Live Oak did was it quickly went after the opportunity for PPP loans; payroll protection plan loans, and other loans that were part of the financial stimulus to help businesses through the pandemic, but they have a table that breaks those out. This table I think is really, really handy, so you can see their core growth because the total loans, the value of loans and leases portfolio actually fell slightly sequentially. $6.53 billion in the first quarter of the year and fell to just over $6.5 billion. But the vast majority of that is PPP loans that were forgiven. They came off of its books.
This purple shows that it's just its core regular business and as you can see sequentially its loan book continues to grow in that area, so it's executing incredibly well. Just one more real quick, I think I want to share the dividend chart as well, because again this is like Visa (V 0.05%) to an extent and that it's a very, very low yield, 0.17%. Really what that boils down to is the dividend is three cents a quarter. It's a tiny little dividend and it hasn't been increased, in its case in a few years you see that 2018 period because management is identified right now as an opportunity to grow and retaining capital to invest in growth is the far more prudent decision right now. This is a bank that's great to own not for the dividend today, but for the dividend 10, 20 years from now as the business matures. Matt, I'd love to hear your thoughts on.
Matt Frankel: One of the most interesting parts of that, you showed that; the chart with all the circles of the industries they go after. Live Oak actually went to an industry if it doesn't have an industry expert on its staff in that industry. They started the veterinary loans. All the way in the right corner of the screen you'll see a little bubble, this is veterinary in purple. That was what they started out as, that's all they did when they started the business. They wanted to veterinary businesses.
They hired a veterinarian who could do the business really well, and used that to make better risk decisions than anyone else could. Because if you walk into a Wells Fargo (WFC +1.21%) for a business owner or Bank of America (BAC 0.56%), there's not a veterinarian sitting there. There's not a solar energy expert sitting there in the building, there is not a self-storage expert. It's being a big competitive advantage. Another thing, it's not just a growth, their default rates have been phenomenally good compared to the rest of the industry. It's a unique lending model because of that specialization. I don't know of any small business lenders that specialized quite in that type of way. It's a really interesting business, not a great dividend stock right now, but I could see that changing definitely 10 years down the road.
