Summary
- New York Community Bancorp has looked inexpensive for some time based on the significant decline in the share price and robust dividend.
- However, the company's compound average annual return over the last decade and a half has been dismal - less than a certificate of deposit.
- The company's operating metrics are uninspiring and have been lackluster or declining since well before the financial crisis.
- The core issue is the high dividend payout ratio, resulting in minimal growth in book value and a reliance on issuing new shares for additional equity, thus diluting current shareholders.
- The current low valuation may offer a modest opportunity, but it's hard to see significant growth in share value over the long term.
New York Community Bancorp (NYCB) has attracted our attention over the years due to the company's high dividend yield and periodically modest valuation based on a book value and earnings multiples. The recent depressed valuation resulting from the significant decline in share price over the last two years caused us to revisit the company.
However, every time we consider the bank – including this latest review – we find relatively little appeal in the company’s shares due to the bank’s weak underlying performance. The avoidance has been fortuitous since over the last decade and a half, an investment in the company’s shares has provided a total return equal to or less than one of the bank’s certificates of deposit. The robust dividends over that period of time – especially were they reinvested – have been almost entirely offset by the decline in the company’s share price.
Ultimately, New York Community Bancorp’s core issues aren’t banking regulation, low interest rates, or rent control laws. Instead, the company’s core issues from an investor standpoint are a longstanding erosion in operating metrics and a lack of earnings retention to propel long term growth – factors which were evident well before the financial crisis. The recent decline in valuation below book value (although not tangible book value) may provide a limited opportunity should the shares revert to a more historically consistent valuation. However, the shares provide few long-term attractions beyond an occasional trading opportunity (which is not our specialty), especially when compared to other opportunities in the community and regional banking sectors.
Lackluster Historical Returns
As mentioned above, an investment in New York Community Bancorp has been a marginal proposition for more than the last decade despite the robust dividend.
Specifically, the company’s common shares traded at a split-adjusted $16.31at the end of 2002 versus the current valuation closer to $9.75. In the interim, the company paid a cumulative $15.00 in dividends (calculated through the end of the current quarter), resulting in a compound average annual return over the last 16.5 years of only 2.5%. In the event those dividends had been reinvested, the long-term compound annual return falls closer to an even more dismal 1.0%. The decline in the share price over the last decade and a half has offset virtually all of the cash dividends paid on the company’s common stock. The company’s own financial filings over the period bear out these statistics.
The results are myriad – and blame is often assigned to various exogenous factors such as banking regulation after the financial crisis, disincentives to grow, rent control legislation, etc., but our view is that the low returns are associated with something far more fundamental to the business – poor underlying fundamentals – which were evident long before the advent of the financial crisis and low interest rates.
