Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out the previous selection.
This week, we'll turn our attention to small Southeastern community bank Republic Bancorp (NASDAQ:RBCAA) and I'll show you why small banks can sometimes pack a big dividend punch.
It isn't easy being a bank
As you might imagine, being a bank hasn't been easy over the past five years. Although things are vastly improved in the industry from where they stood during the recession, there are multiple factors still working against a small community player like Republic Bancorp which has branches in Kentucky, Florida, Tennessee and Indiana.
For starters, despite being focused on the Kentucky market, as of three years ago it boasted total deposits that paled in comparison with the likes of PNC Financial (NYSE:PNC), Fifth Third Bancorp (NASDAQ:FITB) and national banks like JPMorgan Chase (NYSE:JPM), which all had anywhere from one and a half to three times as much in deposits as Republic Bank & Trust. PNC, Fifth Third, and JPMorgan Chase have deep pockets, more locations, can offer far more financial service products than Republic Bancorp, and are generally household names in these regions.
There's also the negative sentiment surrounding Republic Bancorp's backing out of a deal last month to purchase the banking arm of H&R Block (NYSE:HRB). H&R Block, not wanting to fall under the scrutiny of Frank-Dodd Act, which would increase the amount of capital it would be required to hold, had agreed over the summer to sell its banking unit to Republic Bancorp, with the assumption that Republic would apply for a national bank charter. Despite offering no specific reason for backing out, we now know this deal isn't going through and Republic won't be expanding its business by utilizing H&R Block's banking business.
The Republic Bancorp advantage
But as you might imagine, there's a lot to like about Republic Bancorp as well.
To begin with, Republic has been in acquisition mode for much of the past couple of years, most notably acquiring the failed Tennessee Commerce Bancorp in 2012 which at one time had $1.16 billion in total deposits in the year before its failure. Overall, Republic purchased two FDIC-insured failed banks last year, allowing it to grow its business on the cheap by gaining new branches, customers, and most importantly, deposit money! It ended its most recent quarter with $3.3 billion in total deposits.
Republic is also delivering where it counts, in the earnings column. In its third-quarter report released two weeks ago, the company announced that its non-performing loans have now fallen to just 0.79% from the 1.3% it reported at the end of fiscal 2010 while its return on assets and net interest margin through the first nine months of the year came it at a respectable 0.95% and 3.55%, respectively. Republic was up against some very non-comparable profits last year because of its two FDIC acquisitions, so the key aspect to note here is that net interest margin isn't falling and the credit quality of its loan portfolio is improving.
Republic also holds a valuation advantage over a number of its peers. One of the oldest adages in the banking sector is to buy a bank when it trades well below book value and sell it when it gets above two times book value. Republic is currently valued at a mere 88% of book value, signifying that it could offer much better value than its aforementioned Kentucky peers like PNC, Fifth Third, and JPMorgan Chase which are valued at 105%, 102%, and 99% of their book value.
Show me the money, Republic Bancorp
Let's face it: What really makes Republic unique is the incredible number of dividend increases this relatively small community bank has under its belt.
Since initiating a dividend in 1998, Republic has raised its dividend in each of the next 14 years. Since its initial dividend of $0.0275, Republic has upped that quarterly stipend 540% to what is now a $0.176 payout per share, or 14.2% annualized dividend growth since 1999. And this doesn't even count the $1.10 it paid out in special dividends last year!
Furthermore, Republic's payout seems very sustainable, given that its annual payout of $0.704 is still less than half of what it's expected to bring in for profits in fiscal 2013 and 2014. This would imply the potential for ongoing dividend growth while still leaving plenty of cash on hand to make earnings accretive acquisitions.
There are few small-cap banks out there where you'll find the combination of value (trading below book value), a large dividend payment (3.1% yield), and a 14-year streak of increased dividend payments. When compounded with Republic's ability to finance acquisitions as well as its recent deposit growth and loan quality improvement, I see no reason Republic Bancorp couldn't fuel an income-seekers dividend portfolio moving forward.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Fifth Third Bancorp, JPMorgan Chase, PNC Financial Services, and Republic Bancorp. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.