Seacoast Banking Corporation to Keep Dividend Intact?

Yesterday morning, Seacoast Banking Corporation of Florida (NASDAQ: SBCF) declared its 1Q 2008 dividend of $0.16 per share, indicating a forward annual dividend of $0.64 per share. I must admit, I am somewhat surprised by the decision of the board of directors to keep the dividend intact in this challenging economic environment. I have adamantly believed that before SBCF could come out of the gutter, they would have to cut their dividend just as their peers have. However, after reviewing the factors, it seems that at least 80%, if not 100%, of the SBCF dividend of $0.64 is safe for 2008.

For instance, Washington Mutual and Citigroup have reduced their dividends and IndyMac Bank had to eliminate its dividend entirely in an effort to preserve capital. Now, we have SBCF – a regional bank positioned right in the middle of one of the hardest hit areas in terms of foreclosures and housing slump: South Florida. How can you expect SBCF, a small regional bank to perform well enough to maintain their dividend? Even if all is well with SBCF (it’s not, the earnings indicate otherwise), certainly a small regional bank in South Florida is not immune to what the other banks are facing around the nation.

Well, SBCF is certainly not immune. 4Q 2007 earnings were 67% lower than they were in 2006 and 2007 earnings were 60% lower than in 2006. SBCF did remain profitable during 2007, posting earnings of $0.10 per share for the 4Q 2007 and $0.51 for the entire year (including a loss of $0.17 on securities restructuring charges).

A dividend cut may still be inevitable. SBCF is currently sporting a 100%+ payout ratio, which is not sustainable. Thus far, however, SBCF management has yet to comment on its future dividend policy – no discussion was mentioned during the earnings announcement or conference call. Additionally, in the dividend declaration announcement, the only reference is that this $0.16 for the quarter indicates a forward annual rate of $0.64. This may just be a formality, but if SBCF was serious about cutting the dividend in the near-term, it would have been wiser to omit this arbitrary phrase. The upcoming quarter and annual shareholder meeting should provide some real insight as to what SBCF is going to do with its dividend.

In the meantime, with SBCF trading around $11.00 per share, $0.64 indicates a forward yield of 5.8%, which is better than most savings accounts and CDs. The SBCF CEO did mention that 2008 will include cost savings measures of $3.5M or roughly $0.18 per share. It is possible that some of this $0.18 will be saved via a dividend reduction, however it is unlikely that all of the savings will come via dividend reduction. Even if that was the case, it would bring the annual dividend to $0.46 per share, which still would indicate a yield of 4.2% - still better than many FDIC insured, interest-bearing deposit accounts.

Realistically, can SBCF keep its dividend intact? Mathematically, with a 100%+ payout ratio, the answer is no. However, at this stage, with the dividend declaration for the quarter at $0.16 and lack of discussion about eliminating the dividend, it would not be out of the question to keep most of the dividend, if not all of it, intact. Again, I admit, this is a surprising move by SBCF directors, at least to me. To disclose, I am a buyer of SBCF at these levels and took a sizeable position under $8.00 per share. Certainly, the 8% indicated yield on my under $8 purchases is very attractive to me – I am not going to be noble and not take it. I have strongly voiced the opinion that in order to get the stock price back on track, a dividend reduction would be needed. This effort was more akin towards eliminating doubt from the investment community mind and playing the game rather than out of need of preserving capital.

SBCF has clearly been out of favor. At the close of January, 2008, the short position rose to 2.7M shares, or about 14% of the shares outstanding. The earnings report came in at $0.10 for the 4Q 2007 and missed the $0.19 estimate badly. However, the $0.10 was $0.01 above the low end estimate of $0.09. The stock has reacted strong since then and risen 40%+ on some of the largest volume in SBCF trading history. Some of this action is certainly attributed to short covering and I do think we will see a reduction in the short position once the February 15, 2008 numbers are posted.

As for the dividend, I am not going to say it is 100% safe, but it appears that the bulk of it will be, at least for 2008. SBCF remains profitable and as of December 31, 2007, it had $113M of cash and $207M of debt on their balance sheet. Banks do carry debt, of course, but compared to many other banks, SBCF is in a pretty strong position. Note Bank of Florida has $17M in the bank and $170M in long term debt. Bank Atlantic: $125M cash vs. $1.9B of debt; First State Financial: $8.5M cash vs. $35.8M of debt. It is not the most sophisticated measurement, but SBCF carries less than 2 times debt as it does cash compared to some of its peers that have 10+ times more debt on their books than cash. You can add in additional factors, such as a favorable interest rate environment that would allow SBCF to inexpensive take on additional debt to fund dividends if need be. SBCF has plenty of room and continues to operate in the black and maintains strong financial and liquidity ratios. Additionally, keeping the dividend 100% intact would cost SBCF about $12.3M for 2008 – that’s a lot of money, but even with 100% payout ratio, it might chew into SBCF’s cash to the tune of $6M-$7M based on the low-end analyst estimates of $0.30 EPS for 2008.

SBCF business will likely remain sluggish through 2008, but patient investors should ultimately benefit and take advantage of the 5%+ yield during the interim. As for the stock price, we can ultimately look forward to some form of a recovery in SBCF’s service area and hopefully the shorts will get sick of paying the dividend.

Disclosure: Author has a long position in SPCF