A Select Group Of Banks Has Generated 4% Dividend Growth In Each Of The Last 6 Years

by: Todd Rosenbluth


Unlike other industries, it is rare to find banks with long-term records of dividend growth.

Smaller-cap banks are more likely to hike dividends due to the lack of regulatory controls of capital plans. We think looking at dividend payout ratios provides insight into growth potential.

SPDR S&P Bank (KBE), a $2.5 billion ETF, offers exposure to these companies in a low-cost portfolio.

With the financial crisis of 2008-2009, many long-dividend-paying banks cut their cash payments. However, S&P Capital IQ thinks the tide has turned and investors can again find consistent payers, aided by relatively low earnings payouts. We think the below stocks and a diversified equal-weighted ETF are compelling.

According to SNL Financial, 13 banks have increased common dividends declared by 4% or more for six consecutive calendar years. While the 2008 financial crisis is far in the rearview mirror, banks in general do not provide the dividend growth records that can be found in consumer staples or industrials.

For example, Vanguard Dividend Appreciation Index (NYSEARCA:VIG), an $18 billion ETF that holds companies that have raised dividends for at least ten consecutive years, has a 6% stake in financial services, compared to 26% and 21% in consumer staples and industrials, respectively.

Shareholders of diversified bank Comerica (NYSE:CMA) saw dividends increase more than 300% from 2009 to 2015. The dividend, which was cut sharply in 2008 before the bank began a series of hikes, now pays an $0.84 per share annual dividend (2.2% yield). My fellow S&P Capital IQ Equity Analyst Erik Oja sees CMA as well-positioned, in the longer term, to grow lending in California (real estate), Michigan (autos) and in Texas (health care, partly offset by energy).

Based on 2016 earnings forecasts, CMA's dividend payout ratio is 26%, giving it room for future dividend increases.

Oja highlighted that many large banks such as CMA must regularly submit capital plans under Dodd-Frank Act Stress Tests, which can limit their ability to return more money to shareholders. Generally, he noted large banks are discouraged by regulators from paying out more than 30% of normalized earnings.

According to research written by Kate Garber and Carolyn Duren of SNL Financial, Missouri based UMB Financial Corp (NASDAQ:UMBF) was another consistent dividend grower. The small-cap regional bank experienced 34% dividend growth during the last six years, ending 2015 with a $0.98 per share dividend; UMBF recently yielded 2.3% and also has an A- Quality Ranking. https://www.snl.com/InteractiveX/Article.aspx?cdid=A-34998603-11050

Based on a Capital IQ consensus estimates, UMBF has a 33% dividend payout ratio, providing the bank with flexibility to continue to raise its dividend.

S&P Capital IQ and SNL Financial are part of McGraw-Hill Financial.

UMBF and CMA are both holdings in SPDR S&P Bank (NYSEARCA:KBE), an equally weighted financials ETF with $2.5 billion in assets. KBE has a 1.7% 12-month yield. The ETF has a 0.35% expense ratio and trades 2.6 million shares on a daily basis with a penny bid/ask spread. The ETF gathered $63 million of fresh money in the fourth quarter of 2015, according to etf.com data.

We like KBE because of its, low costs, its liquidity and for its exposure to smaller-cap banks that we think are more likely to grow its dividends at a faster pace.

Other companies on the SNL list were BancFirst (NASDAQ:BANF) and Tompkins Financial (NYSEMKT:TMP), which experienced 56% and 38% growth, respectively over the past six calendar years. BANF recently had a 2.6% dividend yield, while TMP had a 3.3% yield.

BANF and TMP have 35% and 48% dividend payout ratios based on a 2016 consensus estimates, which we also believe will provide room for dividend increases.

We think investors seeking exposure to banks with dividend growth should consider these consistent dividend payers.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I wrote this article for my employer and it has appeared on its website.

Additional disclosure: See disclosures here. http://t.co/AHwSBhyHHt