When growth investors are hunting for a new holding, the list of prospects typically doesn't include bank stocks. Indeed, it's entirely possible the average growth investor has no exposure to the entire financial sector. It's just not that kind of business.
Except not every name in the broad financial sector (or the banking industry in particular) is too boring for growth-minded investors to consider. While it's a bit off the beaten path, regional bank stock New York Community Bancorp (NYCB -0.44%) brings a surprising amount of upside potential to the table, along with a healthy dividend in the meantime.
If nothing else, it would be a smart way for someone to add some diversity to an otherwise-unbalanced portfolio.
Don't let its size fool you
Don't sweat it if you're not familiar with New York Community. Most people aren't. The bank is dwarfed by megabanks like JPMorgan Chase and Wells Fargo in terms of total assets under management (AUM), and New York Community Bancorp's market cap of only $5.5 billion keeps it off of most investors' radars.
Don't let its relatively small size fool you, though. New York Community Bancorp's 230 branches and nearly $60 billion AUM are more than enough of a foundation to build on. And the company is doing just that.
Between savvy acquisitions like last year's purchase of Flagstar Bank and an intense focus on customer service -- New York Community was named American Banker's top bank for overall customer experience in 2021 -- the New York-based enterprise is drawing and keeping a crowd of customers. Just five years back, the bank's asset base was considerably smaller at less than $50 billion. By banking business standards, that's incredible growth, especially considering a global pandemic has rattled the world for a couple of years between now and then.
Those who know the company well will know the stock's not made any forward progress during this period. However, they'll also know why: falling interest rates. The profitability of lending is crimped when rates are low.
It's what is happening now on this front that makes this ticker worth a growth investor's consideration.
The changing environment works in its favor
So what's happening? Interest rates are on the rise. The average rate on a 30-year mortgage in the United States currently stands at 3.7%, according to data from the Federal Reserve, up from the multi-decade low of less than 2.7% hit in early 2021.
And that's without any actual support from the Federal Reserve's Open Market Committee (FOMC), which determines the federal funds rate that serves as a baseline rate for most lenders. The FOMC's targeted federal funds rate is still just above zero. Look for increases in the near future, though, and a lot of them. The committee believes at least three quarter-point rate hikes are in the cards for this year, with 10 quarter-point rate increases plausible between now and the end of 2024. At that point, the federal funds rate would be on the order of 2.5%, meaning interest rates on all loans will be at least that much higher than they are now.
These changing underpinnings would make New York Community Bancorp much, much more profitable than it is right now.
This paradigm shift is starting to be priced into the stock. Shares are currently valued at just under $12, up from 2020's low of $7.72. Even with that advance, though, the stock's still well below its value from several years ago, before interest rates began a multiyear slide. There's a great deal of ground to make up. Investors as a whole just aren't seeing how much room remains to price in a full recovery of all that was lost.
The kicker: You can get into this rebounding banking stock while the dividend yield is an incredible 5.8% -- a dividend it's never really struggled to pay.
(Far) more growth than income
While the yield is high, note that New York Community's quarterly dividend payment of $0.17 per share hasn't budged since all the way back in 2016, when rates really started to slump. In fact, the payout's been quite static for years now, with the company broadly preferring to invest in its own growth rather than beef up its dividend payment. If you're an income investor looking for dividend payments to grow over time, this isn't a great long-term pick for you, even if rising rates inspire and allow New York Community Bancorp to increase its dividend payout.
But that's precisely the reason growth investors would want to add some diversity and current income (which can be used to buy other growth stocks) to their portfolio with this pick. Assuming the economy doesn't outright crash, rising rates are on the verge of spurring uncharacteristically strong profit growth that the company is apt to use to invest in more of this very same growth.
Bottom line? There may be more aggressive growth stocks out there, but none from the financial industry that also pay this sort of dividend. NYCB would be a great way for someone that's unintentionally taken on too much growth-minded risk to mellow out their portfolio just a bit, but not so much that it unnecessarily crimps that portfolio's potential. The additional sector diversification owning the stock would likely achieve is just a nice fringe benefit.