New York Community Bancorp (NYSE:NYCB) is again on my radar. The multi-family lending financial institution within the New York City space has lengthy supplied one of many highest dividend yields of the regional banks. I’ve additionally, every so often, thought it was poised for share value beneficial properties as effectively. The yield stays strong, nevertheless, share value upside has been onerous to return by.
The financial institution introduced what ought to be a business-changing merger with Flagstar Bancorp (NYSE:FBC) in April of final 12 months. However, it nonetheless hasn’t gotten regulatory approval as we close to the one-year mark since that merger was introduced. Normally, this could be a trigger for concern.
However, as Stephen Simpson lately famous, many large financial institution mergers have gotten slowed down throughout the present administration. An govt order from President Biden has modified the FDIC’s course of for evaluating mergers. This has led to delays, whereas sluggish confirmations of cupboard members additional gummed up the works.
Big acquisitions from the likes of M&T Bank (MTB) and Toronto-Dominion (TD) have confronted for much longer than traditional wait occasions earlier than regulators completed up their diligence. As such, there is not any purpose to suppose that NYCB’s cope with Flagstar is in any hassle. The mixed entity can be a lot smaller than M&T or TD, in any case, and there is minimal geographic overlap between Flagstar and NYCB, so it appears the delay is solely as a result of authorities working at its personal tempo.
That stated, NYCB infamously tried to purchase Astoria Financial again in 2016, after which had that deal break up after financial institution shares shot up in November 2016, making NYCB’s supply insufficient by comparability. Shareholders with a protracted reminiscence is likely to be having a way of deja vu, on condition that that is the second proposed acquisition by the financial institution that has failed to shut in a well timed method.
Still, I see no purpose why Flagstar would need to stroll. Its share value continues to be monitoring NYCB’s supply and it is unlikely that anybody would pay extra given the sell-off in financial institution shares extra typically. So, for buyers with endurance, Flagstar will nonetheless be becoming a member of the NYCB household; it is simply taking a couple of quarters longer than we’d have hoped.
Why Flagstar Matters
How does Flagstar change issues for NYCB? The largest distinction is it will get them extra low cost deposits. NYCB does not have a powerful deposit franchise, and lends considerably more cash than is supported by its personal core deposit base. This means it has to make use of higher-priced funds to fill out the distinction, and that is particularly disagreeable throughout a charge mountaineering cycle the place short-term liabilities reprice sooner than longer-term industrial property.
So getting Flagstar instantly lowers NYCB’s value of funding, and to a fairly dramatic diploma at that. Flagstar additionally diversifies NYCB away from its major focus of rent-stabilized residences in New York City. This enterprise has been exceptionally regular through the years, resulting in the financial institution’s best-in-class mortgage loss ratios. However, the financial institution has stagnated for the reason that monetary disaster, and maybe NYCB’s new CEO felt that including Flagstar’s mortgage banking and warehousing enterprise may give the general firm a lift.
Flagstar inventory is now buying and selling — extremely sufficient — at simply 4x trailing earnings and 70% of e book worth. That stated, these earnings must be discounted considerably, on condition that the mortgage growth can be abating as rates of interest surge. That stated, analysts nonetheless see Flagstar inventory at lower than 7x this 12 months’s earnings, so NYCB is shopping for a well-priced asset, even penciling in a softer housing market.
I consider NYCB shares will commerce considerably increased as soon as the Flagstar deal closes and other people begin seeing the bounce in quarterly earnings numbers. NYCB inventory has upset folks for therefore lengthy that there is a normal air of skepticism across the firm. Even with a brand new CEO and transformational merger on the way in which, of us simply can not help however count on the worst, I suppose. I see it, nevertheless, as an opportunity to purchase an extremely protected excessive yielding inventory that has some likelihood at enhancing sentiment later this 12 months.
NYCB Stock: Slumping Along With Fixed Income
When you are shopping for one thing that’s primarily an earnings automobile, the entry value issues an incredible deal. People could complain about one thing like NYCB inventory not going up with the S&P 500, however for those who purchased it as an earnings play, the proper comparability could also be in opposition to bonds, not shares.
Since the beginning of 2020, for instance, NYCB inventory has produced a complete return of 0%, the Pimco Active Bond ETF (BOND) has returned -2%, and the iShares 20-Year Treasury Bond ETF (TLT) has returned -4%. Just because it would not make a lot sense to purchase the Nasdaq QQQ (QQQ) for dividend earnings, a inventory like New York Community is not designed to carry out in-line with a excessive beta tech inventory. If you purchase a 7%-yielding inventory, the central query is whether or not the dividend is protected and well-supported by earnings.
And for New York Community Bancorp, that reply is a convincing sure. During its enterprise trough a couple of years in the past, earnings bottomed out round 80 cents per share (excluding the one-off accounting cost in 2016), which was solely modestly above the corporate’s 68 cents per share annual dividend. It was comprehensible why some folks fretted about dividend security.
Now, nevertheless, earnings per share are again as much as their highs and are effectively above the pre-Covid ranges. It’s clear that the corporate’s efficiency received an enormous enhance from modifications in financial circumstances over the previous 18 months:
And issues are projected to get higher, analysts have earnings rising to $1.36 this 12 months and $1.53 subsequent 12 months, which might be appreciable additional development on high of the already 50% improve in EPS since 2019.
So why has NYCB inventory trended down once more in latest months if the enterprise has grown a lot stronger?
For one, many buyers deal with NYCB as a quasi-fixed earnings instrument and thus demand a better yield from NYCB inventory to compensate for increased yields on various property.
Here’s a best-in-class most popular inventory, Public Storage’s Preferreds (PSA.PN) (Class N proven beneath for one instance, however all their varied most popular share lessons have related charts as of late). These N shares yield 3.875% at par and have been buying and selling above par ($25) final 12 months, that means the yield to maturity was even decrease than 3.875%. Now they’re down dramatically:
At $19, these now yield 5.1% for one of many most secure lowest-risk most popular shares in America. Presumably, sooner or later within the distant future, rates of interest will return down, the preferreds will get referred to as at $25, and buyers could have gotten a really protected yield within the interim whereas additionally exiting with a $6 per share capital acquire.
It’s in opposition to that backdrop that many buyers are an earnings inventory like NYCB. If top-tier preferreds are buying and selling down greater than 20% this 12 months, you have to mark down the financial institution shares as effectively to garner these earnings buyers’ consideration.
NYCB Requires Patience But Things Can Improve Later In 2022
To be trustworthy, I’d have thought NYCB inventory would rally at the very least a little bit because it grew earnings 50% between 2019 and 2022. That looks like a cloth enchancment within the firm’s outlook. And but, the inventory value is again at $10, simply because it was then. It appears individuals are primarily simply buying and selling it as a bond various and solely care in regards to the yield fairly than its underlying earnings or outlook.
Fundamentals have improved, nevertheless, and can enhance much more as soon as Flagstar joins the household. Meanwhile, the yield is again as much as virtually 7%, and even in a better rate of interest world, I’m nonetheless completely satisfied to carry a inventory for a 7% yield and even modest capital appreciation.
And because it stands, I believe the mixed NYCB/Flagstar may get to 9x earnings projected 2023 earnings, which ends up in a value goal of $13.77. That actually speaks to how awful sentiment is round this inventory, even a middling 9x a number of will get you 35% share value upside. I’m content material to personal for the 6.8% dividend yield, even the inventory by some means fails to rally as earnings additional improve.
I’ve made my peace with the inventory not reflecting the corporate’s basic worth. It’s a money various for me, and I like getting 7% on my cash. That stated, sooner or later you get up and generally your undervalued inventory lastly will get a raise. It’s been a idiot’s errand to foretell upside in NYCB’s inventory value over the previous few years. But on the threat of wanting foolish, I’m as soon as once more optimistic on the financial institution going ahead.