New York Community Bancorp One of the Riskiest Bargains of the Year

| About: New York (NYCB)

Seeking Alpha published an article where the author claimed New York Community Bancorp (NYB) was “one of the best bargains of the year.” I am here to argue why New York Community Bank is extraordinarily overpriced.

The author compares the yields of NYB (over 8%) to 10-year US Treasuries (less than 2.5%). NYB dividends are in danger, as seen from its last earnings call. NYB earned $0.27 and $0.26 per share of GAAP earnings and operating earnings, respectively. NYB distributed $0.25 to shareholders in a dividend. This dividend can only remain for so much longer as high yields come with high risk. The bank may also come into regulatory problems by issuing over 96% of operating earnings to shareholders.

Being the 21st largest bank holding company is simply not an advantage. Any bank with over $50 billion in assets is bound by Basel III and other regulations. NYB has over $40 billion in assets. As stated by CFO Thomas Cangemi, “We're being very, very cautious about getting to that particular mark.” It is simply inefficient for NYB to grow through acquisitions unless the pros of growth greatly outweigh the cons of additional regulation.

NYB is still exposed to mortgage default. While NYB has proven it owns higher quality mortgages than other banks during the crisis, its market of single- and multi-family units has become ever more competitive. NYB must greatly outshine the competition in order to keep its dividends, let alone reach profitability.

With all of the changes in the housing and banking industries, there is one key factor that might not immediately stamp NYB with a “sell” rating. There were rumors circulating that the S&P 500 might add NYB to its index. SPDR S&P 500 ETF (SPY), the largest of the index tracking ETFs, averages about 4.4 million shares of each of its holdings. iShares S&P 500 Index (IVV), another passive index, holds 1.4 million shares of its average holding. An additional 5.8 million shares of held stock by just these two ETFs are enough to make the stock roar to life. There are numerous 2X and 3X ETFs that will also be required to purchase the stock if NYB is selected.

One thing investors would love to see is a high ranking insider purchase the stock at its “bargain price.” No insider has directly purchased stock in more than two years. In fact, there were only sales of executive stock. Morgan Stanley (MS) chief, James P. Gorman, recently purchased $2.1 million worth of MS stock. Four other top MS NEOs also directly purchased shares for a total of $1.74 million. Investor confidence would surge if an NYB executive follows this example.

NYB has a solid business and has survived what is hopefully the worst of the macroeconomic issues. However, investors should be very cautious when approaching the 8% dividend yield, as any fall in NYB earnings will lower or erase the dividend. An executive move to pick up additional stock (regardless of her current holdings/options) will make this stock a buy.

Disclosure: I am long NYB.