First Republic (FRC +0.00%) is in trouble. The bank not only eliminated its dividend, but it also suspended dividends on preferred shares. That's one of those last-ditch things a company does when cash is in extremely short supply. Most investors should avoid it as they look for bargains following the March bank run and its subsequent fallout.
Dividend investors looking for alternatives might want to pick up W.P. Carey (WPC +1.83%), which isn't a bank but actually does some important similar things.
All of the dividends are gone
It isn't unusual for a company facing financial strain to eliminate its dividend payment. So when First Republic did that in mid-March it was hardly shocking. The basic impetus was the bank runs that were, at that point, taking shape at smaller, regional banks. Although the two banks that ended up going under were unique situations (one focused on serving the cryptocurrency sector and the other tech start-ups), more traditional First Republic has gotten caught up in the situation, too.
Image source: Getty Images.
Essentially, it has high net-worth customers that can easily move money around if they choose to, exposing the bank to the risk of swift (and significantly large) cash withdrawals. That wouldn't be a big issue if the bank hadn't invested in long-term bonds it designated as held to maturity. That allows First Republic to keep those bonds at face value on its balance sheet. But if it needs cash to satisfy withdrawals, and it has to sell the bonds, it will likely have to recognize significant losses because rising interest rates have pushed bond values lower (Generally speaking, rates and bond prices move in opposite directions). In that scenario, First Republic will suddenly be a lot less financially secure than it said it was. To help get it through this rough patch, a consortium of other banks pitched in, temporarily providing it with cash to shore up its balance sheet.
Even after that cash infusion, First Republic opted to suspend its preferred dividend. Preferred stock is an odd duck in the capital structure, sitting somewhere between equity and debt. Most companies try to keep paying preferred dividends even if they stop paying regular dividends because it sends a signal that things may be worse than they appear. This move is considered a big red flag; when First Republic eventually files its next earnings update, it will be a very bad reading.
NYSE: FRC
Key Data Points
At this point, most investors will probably be better off watching this still-unfolding story from the sidelines. But what about the opportunity that comes from buying when everyone else is running scared? Well, consider high-yield real estate investment trust (REIT) W.P. Carey as an alternative.
A REIT? Really?
Straight away, REITs are not banks, so this is not an apples-to-apples comparison. However, that's kind of the point. W.P. Carey is technically a landlord with a highly diverse portfolio spanning the industrial, warehouse, office, retail, and self-storage sectors. It also generated around 37% of its rents from outside the United States. You would be hard-pressed to find a more diversified REIT. It also happens to have an investment-grade-rated balance sheet and has increased its dividend every year since its initial public offering (IPO) in 1998.
NYSE: WPC
Key Data Points
It is very well respected and offers investors a generous 6% or so dividend yield. W.P. Carey's shares are trading down around 16% from their highs so far in 2023, which isn't as bad as the 27% decline of the average bank (using SPDR S&P Bank ETF as a proxy) but heading in the same general direction. That's at least partially related to concerns about the impact the banking crisis might have on the real estate niche of the financial sector.
But W.P. Carey has been through difficult times before, notably the Great Recession and the COVID-19 pandemic, without skipping a beat. And if banks aren't as willing to lend, it actually might be a net benefit to a diversified net-lease landlord like W.P. Carey. (Net leases require the tenant to pay most of the operating costs of the assets they occupy.) W.P. Carey prefers to originate its own leases, meaning it is buying property directly from the companies that will turn around and sign long-term leases. That's basically a financing transaction, which is the heart of what banks are supposed to be doing when they make loans. And given W.P. Carey's successful history, it seems reasonable that it will be able to survive the current upheaval and, perhaps, even take advantage of it.
Collateral damage
In some ways it makes sense that REITs would be drawn into the finance downturn along with banks. While they have some similarities, there are important differences. In this case, W.P. Carey might find it has more customers that want to sell property (and instantly sign long-term leases) because they can't find banks to provide them with loans. And given its resilience through other major financial storms, W.P. Carey seems more likely to benefit from the bank runs than succumb to them. If you are looking for a high-yield finance stock, W.P. Carey is worth a deep dive today.
