There is no doubt that Financials are out of favor, as the sector is down over 4% YTD, the worst in the S&P 500. I understand that big banks continue to have big problems, but what about some of the smaller, well-capitalized banks? It would seem that there are some great bargains in that group, so I set up a screen to try to capture them. Here is what I did:
- EPS growth past year > 6%
- Dividend Yield > 3%
- Payout ratio < 50%
- 5-year Dividend Growth >0%
- Price/Tangible Book Value < 2X
- Deposits/Liabilities > 85%
The goal, then, was to identify stocks with stable to rising dividends well above that of the market and with low valuations relative to their assets. The fact that these companies didn't cut their dividend during the downturn and that they are growing their earnings says a lot. Many of these banks have been flooded with deposits at a time when loan demand is slack, potentially creating some earnings leverage as the economy improves. Here are the results (click to enlarge):
I actually own National Bankshares (NASDAQ:NKSH) in my Conservative Growth/Balanced model portfolio, so I am glad to see that it shows up as one of the cheaper names. I would also note that officers and directors own over 6.5% of the company.
While some of these are tiny, most are actually in the Russell 2000. I included trailing PE ratios, all of which are below the market and typically 10-13X. Many of these stocks are down substantially this year, most likely a reflection of concern about the toughening regulatory burden. In better times, deposit-rich banks like these are typically acquired at 2X Book Value or higher, so that might be the ultimate fate for some of these. In any event, I believe that conservative investors might do well to consider smaller banks with the attributes described above.
Disclosure: Long NKSH in a model portfolio at Invest By Model