This year’s rally in bank stocks appears to have slowed to a sputter, but there’s still reason for investors to stick around: banks’ reliable dividends at a time when income investors lack compelling opportunities.
Just take a look at this past week’s gyrations in the bond market. The yield on the 10-year Treasury note dipped below 1.2%—its lowest level since mid-February. While that drop in yields also hurt bank stocks, with the
SPDR S&P Bank
exchange-traded fund (ticker: KBE) falling 3.5% Monday, the yield on the ETF is 2.3%—offering investors both a steady payout and the chance for appreciation.
Looking to bank stocks as an income play makes sense in the current environment. Even though Treasury yields rebounded from their trough earlier in the week, there’s still little money to be made with the 10-year yielding 1.29% as of Friday morning. Some investors may be tempted to tap the high-yield market but yields aren’t great for the level of risk that is assumed. The
SPDR Bloomberg Barclays High Yield Bond
ETF (JNK) currently yields 4.6%, and even though corporations weathered the pandemic well, the historically low yields on noninvestment-grade companies may not justify the risks of default that accompany these bonds.
Enter banks. Not only did the sector emerge from the pandemic largely unscathed, but the largest banks also underwent three of the Federal Reserve’s stress tests in a 12-month window—one more than usual—to further prove their durability.
|Bank / Ticker||YTD Price Change||P/E Ratio||P/TBV||Dividend Yield|
|Citizens Financial Group / CFG||22.0%||9.6||1.3||3.5%|
|M&T Bank / MTB||1.2||11.1||1.6||3.3|
|KeyCorp / KEY||16.8||9||1.4||3.8|
|Fifth Third Bank / FITB||30.0||11||1.6||3.0|
Note: P/TBV=price to tangible book value
The last test, whose results were released in June, was of most interest to income investors. This is because passing the test meant that the Fed would ease pandemic-induced restrictions on capital distributions to shareholders. Last year, the Fed called on banks to temporarily halt stock buybacks and instructed them to cap dividend payouts to the average of their quarterly profits from the four preceding quarters. The idea was to force banks to conserve capital to serve clients struggling during the pandemic.
Were it not for the restrictions, several banks would have been able to maintain or even increase their payouts to investors last year, which is why so many of the biggest banks rushed to announce plans to boost their dividends soon after the results of the latest stress test.
(WFC), for instance, both doubled their dividends and yield 3% and 0.9%, respectively.
But with the rally of bank stocks in a holding pattern—the KBE had been up more than 32% and is now up around 16% for the year—it may make sense to do some stock picking among the regional banks, many of which offer yields in excess of 3%.
Citizens Financial Group
(CFG) is one such bank. It currently yields 3.5% but it has much more going for it. The bank, based in Providence, R.I., recently announced plans to acquire
East Coast retail operations, which will allow it to close some gaps in its branches in the Northeast and mid-Atlantic regions while gaining a small foothold in Florida.
And for now, acquisitions appear to be part of Citizen’s strategy, so long as the deals make sense, as the bank looks to remain competitive in an increasingly digitized industry.