In today's market, financials are my least favorite asset class. From the suspension of mark-to-market accounting, to the complete dependence of the Too Big To Fail (Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan (JPM), Bank of America (BAC) and Citigroup (C), you know the culprits) on further accommodation from the Federal Reserve, I simply do not trust the quote book values and valuations in the financial and banking sector.
Once we see the return of mark to market accounting, the suspension of all of these one-time earnings boosts to paint pretty pictures on quarterly reports and see some normalization in interest rates, I will continue to avoid the TBTF motley crew and the financial sector in general.
The only exception that I have run to with regard to this sentiment is found in New York Community Bancorp (NYB). I view NYB as best-in-breed for a long term holding in the financial sector both for the stability of its business and the strength it has shown through the financial crisis.
One of These Things is Not Like the Others
NYB is not a hot stock. It doesn't get involved in proprietary trading and avoids the massive derivatives exposure that is seen in the monster mega banks of today. NYB is first and foremost a bank and its price performance over the last few years is indicative of the steady nature of their business.
Since 2006 the stock has appreciated very little, moving from 10.74 in January 2006 to 12.79 at recent close, only 19% over 6 years for a 3% annualized gain. Compare that to BAC (-81.2%), C (-93.4%), JPM (+3.8%) and GS (-17.0%), and you begin to see why the slow and steady NYB can win the race in the end.
This is of course forgetting the main reason for holding NYB as your financial sector exposure: the dividend.
Of all the four companies listed above, only GS was able to keep its dividend the same throughout the crisis; starting 2006 at $0.35 per quarter and maintaining it throughout. Citigroup had to completely suspend its dividend from 2009 to 2011, while BAC dropped down to a token $0.01 per quarter in 2009 and JPM dropped to $0.05 from $0.34 for the same time period.
While the TBTF Bankster squad saw such drastic reductions in the ability to pay substantial dividends, what happened with NYB?
Not a darn thing.
NYB started 2006 paying a quarterly dividend of $0.25 per share and maintained that same dividend through the crisis that has demolished so many others. Taking the current yield of 7.82% and re-investing it in NYB would have produced gains well above the TBTF and the market as a whole.
Not Bringing Sexy Back
Past performance is not an indicator of future performance, as the saying goes, but if a bank can weather the greatest financial crisis the world has ever seen and come out relatively unscathed while continuing to pay an outsized dividend, consider me a believer.
Anyone paying attention to the news must understand that the financial industry is not out of the woods yet, regardless of the constant cheerleading we are getting from the White House, Fed and financial media. MF Global's recent collapse and JP Morgan's announcement of large losses from a so-called "hedge" is just further evidence that the recklessness that caused 2008 has not yet been removed from the market. With that in mind, I can't recommend going whole hog into NYB, even though I believe it to be the best of a bunch of bad choices.
NYB does most of its business through financing and re-financing of commercial and residential properties in the New York area. New York real estate has not suffered the same implosion from the sub prime meltdown with properties in New York City continuing to appreciate after a dip at the peak of the crisis. While the potentiality exists that New York properties could implode on a confirmed housing double dip, I feel that the main concern comes from rates decisions at the Fed and the possibility of rising rates and falling re-financing volumes.
As rates rise, refis are much less attractive and people will have to be willing to get into new mortgages to avoid even higher rates at a fast enough pace to replace the lowered refi volume. The normalization of rates, while scary for a whole host of reasons, should be something that this almost 20 year old community bank can deal with.
The Verdict Is In
If you feel that your portfolio needs exposure to the banking and finance sector and your time frame is longer than a few months, NYB is the only equity that I would feel comfortable putting money in. It has proven to be a stable stock even through unstable times, paying a sizeable and consistent dividend that will especially benefit those that practice dividend reinvestment. Once your stock from the almost 8% dividend starts buying more stock, you are getting quite the virtuous cycle.
NYB is a great choice for a 401k or IRA but does not have the volatility that most traders look for when swing trading or day trading. Covered call writing against the shares is another way to increase the effective dividend on the shares with the only worry coming from your shares being called away and potential tax implications.
The stability of the stock favors the dollar cost averaging that is seen in retirement accounts and long-term portfolios and the current almost 8% dividend will only get better if the market continues down due to Europe and China fears. As always, uncertainty reigns supreme in the financial sector. NYB gives you the benefit of a solid performance record through troubled times and that is enough for it to be my favorite of a bunch of bad choices.