For investors looking for both safety and cash flow then it doesn't get much better than a growing American bank with a small market cap, rock solid balance sheet and a dividend to go along with it. Especially considering the fact that the Fed has started raising interest rates, which we know benefits banks perhaps more than any other industry in the market. And BancFirst Corporation (NASDAQ:BANF) has been one of the best performers out there over the past couple of years and is only getting stronger at the beginning of 2016.
With a mean target of $60 per share, a consensus of 3 analysts sees at least 14% upside from current prices. And while that may not be enough for some investors to get excited about, it is certainly an adequate return for the conservative investor with a long time horizon. And with such strong fundamentals, it seems highly likely that this upside will materialize sometime in the next quarter or two as dividend paying banks begin to look more and more attractive to investors seeking safety. But with a market cap of only $811 million, at the rate the company is growing, I see a lot more upside than 14%.
With a profit margin of 23%, BANF has one of the higher margins in the industry, and the most recent earnings report also showed 4.5% top line growth, which is a solid number as we go into a choppy earnings season where sales are widely expected to disappoint as we saw with Apple and other major companies reporting over the last few days. When you add all of these nice fundamentals together what you get is an overall picture of a very healthy and growing company going into a favorable period of increasing interest rates while investors look hard for value in an overpriced stock market.
In addition to the nice figures above, BANF also has a nice ROE of 10.54%. So not only is BANF outclassing other major banks, but its doing it easily and trades at a very reasonable valuation. With a forward P/E of only 11, the company is trading at a huge discount to the average P/E of the overall market that is closer to 20. Perhaps investors are just traumatized by the catastrophic losses of the banks during the financial meltdown, but BANF is now in fantastic shape, and the macroeconomic environment couldn't be more different than it was a few years ago for banks.
With a conservative dividend payout ratio of only 33%, it is likely that the decent 2.70% dividend will continue to increase going forward as the bank continues to produce more cash flow and interest rates gradually rise throughout the year, which the Fed has said it intends to do. And if the market continues to fluctuate intensely as it has done over the past couple of weeks, a dividend paying bank becomes even more attractive to conservative investors that understand dividend paying stocks tend to perform well in this environment.
If 2016 turns into a bear market what will happen is the same thing that happens in every bear market. Capital will fly to the safety of dividends, which will be buttressed by these capital inflows and will outperform the market on the way down while providing cash flow until the market recovers. Whether or not we are entering a bear market or simply a more volatile one remains to be seen, but in either case BANF is likely to provide safety and cash flow for the investor looking to preserve capital and wait for better days in the market to return.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.