Regional banks were hammered in early 2023, thanks to troubles at a small number of banks. New York Community Bancorp (NYCB) was actually one of the better performers through that difficult and uncertain period. But when the bank reported full-year 2024 earnings, it shocked investors by cutting the quarterly dividend from $0.17 per share to just $0.05. That's a 70% decline in the dividend -- and a warning sign that this may not be the right dividend stock for conservative investors.
What happened to New York Community Bancorp's dividend?
In early 2023, fast-rising interest rates created a timing problem for some banks. They had bonds on their balance sheets that were intended to be held to maturity, but the value of those bonds had declined because of the swift change in rates. If the assets had been held to maturity, there would have been no problem, but for various reasons a small number of banks experienced a high level of customer withdrawals. That required these banks to sell the bonds that had fallen in value and, thus, they were suddenly not as well capitalized as investors thought.
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Basically, there was a bank run, and it caused a few banks to go out of business. One of those banks was Signature Bank. New York Community Bancorp stepped in and bought parts of Signature Bank. This increased the size of New York Community Bancorp and, in turn, subjected the company to more regulatory scrutiny. The key here is that larger banks are required to better safeguard customer deposits.
At the same time, New York Community Bancorp has experienced trouble with a couple of material loans. Highlighting the risk, in the fourth quarter, management increased the allowance for credit losses to $992 million from $619 million just three months earlier, a 60% jump in a single quarter. That's a fairly large change in a very short period of time. The takeaway from all of this is that the risks here are material.
Thus, New York Community Bancorp cut the dividend. That frees up cash it can use to shore up its capital structure and appease its regulators.
Doing what needs to be done
From the perspective of New York Community Bancorp, it is acting quickly and decisively to solve a problem. In fact, cutting the dividend was probably the right decision for the bank to make. And it should help to speed up the process of muddling through this rough patch. A more aggressive long-term investor interested in turnaround situations might find that appealing. And, assuming the worst is behind the bank, such an investor could collect a 4.4% dividend yield while waiting for management to get the bank back on track.
That said, for conservative dividend investors, it might make more sense to stay on the sidelines until there are more substantial signs of improvement. Such signs might include the allowance for credit losses stabilizing (or falling) or, even better, the dividend being increased again, among other things. The problem is that, right now, the bank is still in crisis mode. The issues it faces are so worrying that the company shifted the executive reporting structure. It elevated a board member to executive chairman and, effectively, gave him the power to make major decisions. That's what you would normally expect the CEO to be doing.
Of course, all this activity could lead to a brighter future. But right now the signs are worrying, and probably only the most aggressive investors should be looking at New York Community Bancorp. What's going on isn't the end of the world for the bank, but it biases the risk/reward profile more toward the risk side of the equation -- and that's just not appropriate for more conservative dividend investors. And mending the capital structure is unlikely to be a quick process.
Interesting stories don't always make good investments
What's been going on at New York Community Bancorp has been headline-grabbing news, and it is very interesting to see the drama unfold. But drama and dividends aren't two things that most investors want going together if they are trying to live off the income their portfolios generate. If you are looking at New York Community Bancorp thinking that it won't get any worse, you might be right. But you could also be wrong. Further deterioration would make things even more bleak for dividend investors. That won't be worth the risk for most income seekers.
