Banks are coming off a strong 2021 and could be in line for continued growth in 2022 and beyond, given the expectation of economic expansion and rising interest rates. One bank in particular that appears poised for growth is PNC Financial Services (PNC 2.93%).
PNC completed a major acquisition in the third quarter of 2021 that transforms it into one of the six largest banks in the U.S. It also pays out a hefty dividend, so if you're a dividend investor, this is a good stock to consider.
A rising dividend that pays $5 per share
Bank stocks bounced back in a big way in 2021 after a disastrous 2020 when they were hit hard during the COVID-19 lockdowns. The economy basically shut down, lending activity slowed to a crawl, and banks were forced to set aside huge provisions for anticipated credit losses. The Federal Reserve mandated that banks hit pause on boosting their dividends or buying back shares.
PNC was able to hold the line on its dividend in 2020, paying out $1.15 per share each quarter throughout the year. In 2021, when the Fed lifted the mandate, PNC increased its dividend in the third quarter to $1.25 per share and maintained that payout. On Jan. 5, PNC declared a $1.25 per share dividend for the first quarter of 2022.
The company now is on track to pay out an annual dividend of $5.00 per share, which would be the 12th straight year of annual dividend increases.
Trading at about $223 per share, the stock has a dividend yield of 2.23%, which tops the median dividend yield on the S&P 500 of 1.5%. PNC has a payout ratio of 38.2%, which is pretty much in line with its historical average. The payout ratio is the percentage of earnings used to pay dividends, and anything under 50% is typically considered a pretty comfortable range. You don't want to see a company paying too much in dividends at the expense of other investments.
PNC's stock price jumped 38.2% in 2021, which was slightly higher than the industry average. This year, through Jan. 10, it's already up 11%.
Going national with acquisition
One of the forces that drove PNC's success in 2021 was its acquisition of BBVA's (Banco Bilbao Vizcaya Argentaria) U.S. banking operations. BBVA USA brought about $87 billion in assets to PNC, which had about $462 billion at the end of the third quarter. The deal gives PNC a total of about $550 billion in assets, which could push it ahead of Truist as the sixth-largest U.S. bank.
The purchase also brought in 2.6 million customers and added almost 600 branches across seven states for PNC in Texas, Alabama, Arizona, California, Florida, Colorado, and New Mexico. Moreover, it gives the bank a national footprint, with 2,700 branch locations and 19,000 ATMs in 29 of the 30 largest markets in the country. There are only a handful of other banks with that kind of scale and national presence.
The merger is expected to result in at least $900 million in cost savings once BBVA USA is fully integrated into PNC. In the third quarter, revenue increased 11% to $5.2 billion, while net income climbed 35% to $1.5 billion, with gains in both interest income (11%) and fee revenue (12%) year over year. Book value, or assets minus liabilities, is $121 per share, up from $117 a year ago. The efficiency ratio is higher at 69%, up from 59%, but that includes $980 million in merger integration costs. That should start to come down as BBVA is integrated and cost savings are realized.
PNC is starting to see an increase in loan activity, both commercial and consumer, with total loans up 16% year over year to $290.2 billion.
That trend should continue into 2022, spurred by the historic federal investment in infrastructure. Also, the Fed is expected to raise interest rates in 2022 at least once, maybe more, which should provide an additional boost for PNC, as well as all banks that have been dealing with 0% interest rates since the pandemic began.
PNC is in a prime position to grow, given the macroeconomic environment and its own expansion. Its dividend should continue to grow with it.