For investors looking for both safety and cash flow then it doesn't get much better than a large American bank putting up strong growth numbers and a dividend to go along with it. Especially considering the fact that the Fed has started raising interest rates, which we know benefits big banks perhaps more than any other industry in the market. And the M&T Bank Corporation (NYSE:MTB) 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.
Priced at only 16.7 times earnings and with a book value of 1 (the 10 year book value growth rate is a very nice 5.4%), the company is a very defensive pick, especially considering the fact that it is growing at a steady clip. With a profit margin of 24%, BK is producing nice cash flow with the most recent earnings report showing strong 8.8%% quarterly year over year top line growth. The company is trading at a sizable 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 MTB is now in fantastic shape, and the macroeconomic environment couldn't be more different than it was a few years ago for banks.
And while that may not be enough for some investors to get excited about, it certainly presents the likelihood of an adequate return for the conservative investor with a long time horizon. With such strong fundamentals, it seems highly likely that 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. When you add all of these nice fundamentals together you begin to see why Warren Buffett bought this stock as it is clearly a very healthy and growing company going into a favorable period of increasing interest rates as investors are looking hard for value in an overpriced stock market.
With a 2.86% yield and very conservative dividend payout ratio of only 37%, it is likely that the 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 few 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 MTB 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.