If I told you that New York Community Bancorp (NYSE:NYCB) has a dividend yield of 6.3%, you'd probably be impressed. The banking industry averages just more than 2%, and the S&P 500 (SNPINDEX:^GSPC) currently pays out 1.95% on average. Tripling the yield of the market at large is pretty great.
But many investors and experts worry that this dividend may not be sustainable, even considering that the bank has paid out $0.25 per share quarterly for 10-plus years. The reason is that New York Community Bancorp routinely pays out 90% or more of its quarterly net income to fund the dividend.
A unique view on capital allocation
Last quarter, New York Community Bancorp had a payout ratio of 94%. That number is, by any account, ridiculously high. BB&T (NYSE:BBT), another regional bank, has a payout ratio of 41%. Larger rival JPMorgan Chase (NYSE:JPM) also pays out 41%. Wells Fargo (NYSE:WFC) pays out even less, at just 33%.
Should investors in New York Community Bancorp be worried about the sustainability of this dividend? Let's consider the bank's options in light of its financial foundation and strategy, and make our own determination.
First, New York Community is one of the highest-performing banks in the U.S. The bank cruised through the financial crisis and hasn't looked back. It has low levels of problem loans, its efficiency ratio is among the best of the best, it returned an acceptable 1% on assets, and 8.3% on equity.
Taken altogether, then, New York Community has the cash flow and profits, the back up liquidity, and the capital to justify paying out the current dividend.
The bank has built a comfort level with the dividend based on the current financial condition of the company; the risk, then, is if something changes.
A boring bank is a good bank
New York Community Bancorp's business model is both niche and also quite boring. The bank primarily makes loans on apartment buildings and other residential properties in New York City. More specifically, the bank's true bread and butter is lending on rent-regulated multifamily housing. These apartment buildings are some of the most in-demand housing options in all of New York. They are about as low risk as lending can be. This high credit quality protects the bank from economic shocks, and stabilizes net income.
Second, New York Community Bancorp is, at this point, still largely protected from the massive new regulatory requirements imposed on the nation's largest banks. The bank reported total assets of $46.8 billion as of June 30, 2014, sitting comfortably below the key $50 billion mark.
At $50 billion, banks are required to participate in Federal Reserve stress tests, and they come under increased scrutiny from the Consumer Financial Protection Bureau. More generally, they are expected to do a whole lot more to ensure perfect regulatory compliance. Those increased costs can do serious damage to a bank's profitability.
Since 2010, New York Community Bancorp has been content hovering just below that important $50 billion mark. As such, the bank has not grown all that quickly. For dividend investors, that's a positive result because it allows the bank's management to pay out a greater dividend instead of using that profit to fund growth.
Banks like Wells Fargo and JPMorgan have been actively growing their balance sheets since the financial crisis. That growth has a cost in terms of funding new assets and maintaining strong capital. These banks have funded that cost with profits.
Not New York Community, though; with plenty of cash and capital on the books, and no need to stockpile even more, management elected to pay out that profit to shareholders, forgo rapid growth, and stay below $50 billion in total assets.
There are always risks, but New York Community Bancorp has earned investor respect
The banking industry is currently undergoing a period of massive change. There's the "new normal," slow-growth economy. There's an unprecedented level of new legislation and regulation. There are new requirements to keep more capital on the books than ever before.
All that change could spur New York Community Bancorp to change its strategic direction. That could mean expanding its lending beyond rent-stabilized apartments. It could mean growing past that important $50 billion mark. (The company is already submitting its own internal stress tests to the Federal Reserve in anticipation of that day).
However, based on the bank's results during the past 10 years, and its current position as one of the highest performing banks in the U.S., investors should have faith in the company's shareholder-first decision making.
In my view, this is the one bank stock any dividend investor should look at first.
Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.