The observant members at Seeking Alpha who read my debut article ("First Portfolio Review - 'The Accelerated Dividend Portfolio") may have noticed that my top-performing stock based on total return was a small cap bank named First Busey Corporation (NASDAQ:BUSE). Not only has First Busey provided a total return of over 46% since initiating my position but my YOC is currently at 3.39%. A link to my article is provided here:
Many dividend investors are not interested in holding too many bank stocks in their portfolio, let alone small-cap banks. As a result, quality small-cap banks historically tend to fly under the radar of many investors. I'm recommending that you reconsider your preconceived opinions in light of the current economic environment we find ourselves in.
Rising Interest Rates
Rising rates shows the confidence that the Federal Reserve has in the strength of the economy. A strong economy is good news for banks in that borrowers have an easier time making their loan payments (fewer non-performing assets). Rising rates also boosts profits because it means a wider spread between their lending and borrowing rates.
Potential for Deregulation
The extent of deregulation (if any) is still to be determined; however, the President-elect has indicated that he will support legislation to deregulate the industry.
Why Small Cap Banks over Large-Cap Banks?
- Smaller lenders could potentially add as much as 40% to their fourth-quarter 2017 earnings if Trump's promises of tax cuts and regulatory changes materialize, according to Sandler O'Neill analyst Brad Milsaps per an article at Business Recorder.
- David Joy, the chief market strategist at Ameriprise Financial Inc., told Bloomberg: "When the economy is doing well and the markets rally, financials tend to be moving in a positive direction as well and that especially benefits those smaller-cap or regional companies."
I strongly agree with their analysis and would like to also add that historically small-cap stocks have outperformed large-cap stocks - yet another reason why you should not only add another financial stock to your portfolio but a small-cap one at that.
More Room to Run for Financial Stocks?
It's true that financial stocks have had a very nice run in a short period of time since the election. The short-term investor may think that they've missed out on an opportunity and look elsewhere, but I think the intelligent long-term investor can still benefit by having small-cap bank stocks in their dividend portfolio.
I would be seriously remiss not to provide a small-cap bank stock for your consideration. The same screening process and methodology (perhaps a future article) that produced First Busey for my dividend portfolio is showing that Sandy Spring Bancorp, Inc. (NASDAQ:SASR) is worthy of your consideration.
How about a bank that:
- Just had record earnings in the third quarter.
- Was recognized in September (for the 11th consecutive year!) by Forbes magazine as being one of the 50 Most Trustworthy Financial Companies in America. This high designation is based on a review by Forbes and an independent research company of nearly 700 publicly traded companies with market caps of $250 million or more.
- Currently yields 2.86% (based on closing price when article was submitted, $36.85) BUT has grown its dividend 86% in the last 4 years;
4Q12 = .14
4Q13 = .18
4Q14 = .20
4Q15 = .24
4Q16 = .26
- Has an active stock repurchase program and has reduced outstanding shares by 4.6% since the end of 2014.
- Was featured last month in the Washington Business Journal where CEO Dan Schrider indicated that he believes the recent record income represents "a new level of performance" for the company and something the company believes can be sustained over the long term. He said the bank is pushing for double-digit earnings growth which will push the bank to grow further.
- Diversified. Sandy Spring Bancorp, Inc., headquartered in Olney, Maryland, is the holding company for Sandy Spring Bank. Independent and community-oriented, Sandy Spring Bank offers a broad range of commercial banking, retail banking, mortgage and trust services throughout central Maryland, Northern Virginia, and the greater Washington, D.C. market. Through its subsidiaries, Sandy Spring Insurance Corporation and West Financial Services, Inc., Sandy Spring Bank also offers a comprehensive menu of insurance and wealth management services. With $4.7 billion in assets, the bank operates 44 community offices and six financial centers across the region.
A few risks to consider while performing your own due diligence on this company:
- Price per share is already up over 35% YTD
- The P/E ratio (NYSE:TTM) is 38% higher than the industry average
- Current P/B is 47% higher than the industry average
In my opinion, there is too much momentum here to ignore, both with Sandy Spring Bank and the economic environment for small-cap bank stocks. So whether you're waiting to deploy dry powder because you believe a market correction is overdue or whether you're willing to invest right now, a small-cap bank could be just what your dividend portfolio needs!
Disclosure: I am/we are long BUSE. 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.