Comerica (CMA -0.15%) is not a big-name megabank, but it has a big-time dividend that pays out a rather large 5.7% yield. Like many small and mid-sized regional banks, it has endured a difficult 2023, given the turmoil that took place in the industry earlier this year and its lingering effects.
But if you are looking for a good dividend stock, Comerica is one to consider. While its stock price is down, Comerica maintains an excellent payout. Here's how the bank can afford it.
Comerica is no dividend trap
One important thing to know about Comerica's high yield is that it is not a dividend trap, which is one that is artificially high and unsustainable.
In July, Comerica declared a $0.71 per share dividend for the third quarter, which is the same as the previous two quarters. It has a yield of 5.7%, which is among the highest in the banking industry. At its current share price of $50 per share, if you owned 50 shares, that would be roughly $36 per quarter in dividends that could be reinvested back into the stock or taken as a dividend. For the full year, it would be about $144 in payouts with 50 shares.
The reinvested dividend makes a huge difference in the stock's return. Without the reinvested dividend, the stock boasts an annualized return of 6.9% over the past three years and 1.8% over the past 10 years, as of Aug. 14. If the dividend was reinvested, the three-year annualized return jumps to 13.1%, while the 10-year return spikes to 5.3%.
While Comerica did not increase its dividend in 2022, keeping it at $0.68 per quarter for two straight years, it has been very consistent. For 13 straight years before that, Comerica raised its dividend each year, and this year it bumped it up to $0.71. The last time Comerica lowered its dividend was in 2008.
The other positive thing about Comerica's dividend is its low payout ratio. Many high-yield stocks have seen their payout ratios -- the percentage of earnings that goes to the dividend -- creep up. But at just 29%, Comerica's payout ratio is within the ideal range.
How Comerica affords its dividend
While Comerica's stock price is down about 25% year to date, that is more reflective of the panic over regional banks that occurred in the banking sector earlier this year than it is of Comerica's performance.
Comerica had an excellent second quarter, as net income climbed 5% year over year to $273 million. While deposit costs were up due to higher interest rates, Comerica was able to increase net interest income, and increase its net interest margin -- from 2.70% to 2.93% -- by having a record quarter for loans. Comerica had $55.4 billion in loans in the quarter, up from $50 billion a year ago in the second quarter.
It also had its second-best quarter ever for noninterest income, up 13% year over year. The rise in noninterest income stemmed from an increase in Federal Home Loan Bank stock dividends, a $5 million reserve for assets held for sale recorded in the first quarter, along with increases in bank-owned life insurance, fiduciary income, and card fees.
Comerica also has excellent liquidity, with a common equity Tier 1 ratio of 10.3%, which is up from 9.7% a year ago and 10.1% in the first quarter and well over the regulatory minimum. Its credit quality is also strong, as its net charge-off rate and its nonperforming assets both declined in the quarter, year over year.
While many banks its size struggle to maintain their balance sheets, Comerica has been able to increase its earnings, keep expenses down, maintain reasonable debt levels, hold on to its deposits, lower its efficiency ratio to 57%, and improve its liquidity. These are all good signs that it will be able to continue to afford its high dividend yield.
