Once upon a time, before marriage and kids, I worked for a Fortune 100 company. My job was unusual, one that many would envy: I was the company's international briefings coordinator. It was my responsibility to plan and host business meetings for every international group that set foot on our headquarters campus for a sales call.
My company was headquartered in Houston, Texas, a sprawling, sophisticated urban melting pot that has recently taken over New York City as the U.S. city with the most ethnically diverse resident population. This means, for better or worse, if you are looking for a "true" Texas experience, you should not come to Houston. We simply look too much like the rest of the world.
A wonderful by-product of this job was meeting people from around the globe. I had an especially strong relationship with the United Kingdom office, which brought in the majority of sales calls. I will never forget one British visitor who had been quite eager to visit Texas. He had grown up watching John Wayne westerns and had a particular vision of what Texas - and Texans - were supposed to look like.
I asked him, "What do you think of our city?" He said bluntly, "This isn't Texas! Where are the bloody tumbleweeds? Where are the bloody stagecoaches? Where are the bloody cowboys?"
I had to laugh. I assured him that the "bloody" tumbleweeds are out in West (not East) Texas; that stagecoaches died out with the advent of the train; and yes, we still had cowboys, just not in our urban metropolis.
Going OTC Is Not as Scary as You Might Think
We often approach new places with similar pre-conceived ideas. Such has been my experience in researching for this "Off the Grid" series. We had a good laugh at my expense in Part Two, where I thought researching the entire world would be easy. What was I thinking? It turned out to be like Star Trek's "The Trouble with Tribbles". Part One explored the reliable Canadians, a familiar territory. This third and final installment takes us "over the counter", or to the OTC market, focusing on U.S. equities.
Deserved or not, the over-the-counter (OTC) market has a reputation as a dangerous place to trade. Yet we have camped out already in the "pink sheets" designation with the last two "Off the Grid" installments, and found many worthy investable candidates. What would we find with domestic issues that choose not to trade on the exchanges, but instead go OTC like their international counterparts?
After research that has taken me three months to compile and finalize, I was surprised. Unlike Part Two, the journey was surprisingly calm, somewhat unexciting, yet still pleasing in its results.
Keeping with the travel theme, the place that came to mind for our video tour was a drive through scenic FM 2222 in my hometown of Austin. The scenery is pleasant, reliable, thoroughly local and occasionally spectacular…but not out of this world.
OTC Markets Explained
"Over the counter" or OTC stocks, do not trade on the major exchanges (NYSE, Nasdaq, et al), as explained below:
The OTC market provides an alternative to stock exchange listing for securities of issuers that either choose not to be listed on a U.S. stock exchange or do not meet the relevant listing requirements. The term 'OTC security' is a catch-all phrase for any security that is not listed on a U.S. stock exchange.
The prevailing wisdom is that companies choose to trade OTC in order to avoid the financial reporting hassles imposed with trading on the major exchanges. While this is true, it is not true that the OTC is merely a dumping ground for rejected stocks, with no classifications or reporting structure imposed on participating companies.
First, there are regulations issued primarily by FINRA regarding execution and quotation.
Second, there are specific trading processes with the broker-dealer.
Finally, and most importantly in terms of your ability to obtain information on these entities, there OTC securities are assigned a particular market tier based on their reporting method. These tiers are OTCQX, OTCQB and pink sheets:
- OTCQX - "The Intelligent Marketplace", is considered the premier tier of the OTC market, trading both U.S. and international issues. The OTCQX platform promotes itself as more technologically advanced and accessible to brokerage houses. The OTCQX requires stricter financial solvency and reporting requirements than the other OTC exchanges. Within the OTCQX there are two tiers: OTCQX U.S. and OTCQX U.S. Premier. Just over 275 companies trade on the OTCQX.
- OTCQB - "The Venture Marketplace". U.S. companies that are not exchange-traded, nor have applied to or qualify for the premier OTCQX exchange, can trade on the OTCQB. The only reporting qualification is to "be current with a U.S. regulator", primarily the SEC, but also FINRA and U.S. banking and insurance regulators. OTCQB companies make financial disclosures via the OTC Disclosure & News Service.
- OTC Pink Sheets - "The Open Marketplace". Companies trading on pink sheets follow the International Reporting Standard or Alternate Reporting Standard through the OTC Disclosure & News Service. While there are many worthwhile and investable companies trading on pink sheets, especially internationally (as we have seen in previous installments of this series), reporting standards are only classified as "current". Financial information may be extremely limited and investing may be risky:
This category includes shell or development stage companies with little or no operations as well as companies without audited financials and as such should be considered extremely speculative by investors.
The website www.otcmarkets.com performs a tremendous service for investors in further classifying potentially dangerous OTC issues as "limited information", "no information", "grey market" and "caveat emptor". There will be no stocks profiled in this series that qualify under these dubious designations.
"Off The Grid" Dividend Growth on OTC Really Is Not "Off the Grid"
A key problem in locating OTC dividend growth stocks is that they are not usually included in the usual stock screeners. U.S. OTC issues did not show up in any of my brokerage screens, and they are not listed as part of the popular screener, www.finviz.com. As a result, I had to go "off the grid" to locate candidates for the OTC Dividend Growth List.
For three months I tracked all dividend announcements made at the extremely helpful website, www.otcmarkets.com. I then hand-calculated many of the dividend growth figures, using information gleaned from brokerage information and at The Dividend Channel.
For all that trouble, you would think there would be a slew of exotic and exciting choices. Not so! Like Dorothy who travels to the whimsical land of Oz only to find "there is no place like home", so was our trip to OTC Land.
What was the primary classification of stock made our OTC "Off the Grid" List? Primarily one: Your local regional bank.
We traveled the world then ended up right back at home.
OTC and David Fish's CCC List
Many excellent regional banks that trade OTC are already listed on the benchmark dividend growth list managed by David Fish:
- Eagle Financial Services, Inc. (EFSI.OB) is a Champion;
- CCFNB Bancorp, Inc. (CCFN.PK), Chesapeake Financial Shares, Inc. (CPKF.PK), Citizens Financial Services (CZFS.OB), Farmers & Merchants Bancorp (FMCB.OB), First Keystone Corporation (FKYS.OB), First Robinson Financial Corporation (FRFC.OB), Juniata Valley Financial (JUVF.OB), Northeast Indiana Bancorp, Inc. (NIDB.OB), and Thomasville Bancshares, Inc. (THVB.PK) are Contenders; and
- Alliance Financial Corporation (ALNC), Farmers & Merchants Bancorp, Inc. (FMAO.OB), and PSB Holdings, Inc. (PSBQ.OB) are Challengers.
There is one, lonely CCC List inclusion that trades on the OTC and is not a regional bank: Computer Services, Inc. (CSVI.PK), a technology service company.
Even with this excellent list, the "Off the Grid" series identified seven additional potential candidates, all regional banks, which may qualify for CCC inclusion. Please see the OTC Dividend Growth List. While these stocks vary in their payout schedule (three out of seven pay only twice yearly), the stocks for which ratios were available are quite attractive:
- Profit margins were high (17% or better)
- P/E ratios were low (under 14)
- Payout ratios were low (under 60%)
The following regional banks are worthy of consideration:
High Country Bancorp, Inc. (HCBC.PK), operating as High Country Bank, is headquartered in Salida, Colorado, and operates branches in Salida, Buena Vista and Canon City. This bank will be especially attractive to the high-yield investor. The twice yearly payer sports a current 5.7% yield, and has the most aggressive dividend growth schedule of all candidates at over 20%. Like most of the regional bank stocks on the OTC, their website does not have a separate "Investor Relations" link, but they do provide financial statements here.
Adirondack Trust Company (ADKT.PK) has their headquarters in Saratoga Springs, New York, and operates multiple branches in Saratoga Springs and the surrounding areas. The yield is decent at 3.39% and the dividend growth nicely handles inflation at 7.90%. Annual reports are available here.
Honat Bancorp, Inc. (HONT.OB), operating as The Honesdale National Bank, is headquartered in Honesdale, Pennsylvania, and operates multiple branches in Honesdale and surrounding areas. The yield is low on this one (less than 2%), but it is the only other candidate of the seven that offers double-digit dividend growth (currently over 16%). Financial information is not readily accessible on the website; there is only an external link to the FDIC which offers more information the bank.
Five additional companies may qualify for the CCC List if they continue on a trajectory of dividend growth. These include George Risk Industries (RSKIA.OB), which has a nice yield of 4% and dividend growth of over 10%, and four other regional banks.
There are some important considerations and disclaimers when considering investing in a regional bank:
- A slower economic environment coupled with low interest rates are hurting profitability;
- There are increased regulations imposed on community banks thanks to Dodd-Frank. The American Bankers Association lists overlapping rules, new powers by state attorney generals, and burdensome implementation of new standards as some of the challenges local banks face in implementing the new legislation; and,
- Some banks face stiff competition from larger institutions, such as for auto loans.
Concluding the Series
Most of the fun in a vacation is planning beforehand. You book your flight, research your lodgings, and schedule your outings to the last detail. Sometimes, though, the best memories are made by the unexpected detour or the unplanned side trip.
On the journey of your investing life, it's best to make up your portfolio with the tried and true: the dividend growth stocks and fixed income that provide growth and stability. Yet I also believe investing should fun. I hope you have enjoyed going "off the grid" with me as we discover stocks not listed on the major exchanges, which may add some fun to your portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I may be looking at initiating a position in HCBC in the near future.