The financial stock New York Community Bancorp (NYSE: NYCB) might be a value pick for investors concerned about a frothy U.S. equities market after a historic 8-year-old bull run. In the context of interest rate risk in bonds due to the Federal Reserve's plan to keep hiking, slowing growth in emerging markets, trade war jitters affecting commodities, and a bear market in cryptocurrency, American investors may be eager to follow the philosophy of Benjamin Graham and find value gems in domestic stocks.
New York Community Bancorp is a commercial bank founded in 1859 and headquartered in Westbury, NY. It serves five states with 270 branches and is part of the S&P 400 MidCap Index (SP: MID). It has a market capitalization of $6 billion and $49 billion of total assets. NYCB is unique in that most of its Community Bank portfolio contains multi-family rent-controlled and rent-stabilized New York City apartment building loans and commercial real estate loans, resulting in an incredibly low default rate of 99 basis points in losses from 1993 to 2018. Other loans in its portfolio include acquisition, development, and construction loans and commercial and industrial loans to small businesses in the metropolitan area. NYCB also prides itself on customer service and convenience to retail depositors in its network of local savings banks.
Fundamentally, NYCB stands out as a value buy because of its price to earnings and price to book ratios. With a price to earnings of 14.32 and a price to book of 1.00, NYCB is arguably undervalued compared to the financials sector and the S&P 500 (INDEXCBOE: .INX). NYCB pays a dividend yielding 5.28%, more than its peer midcap banks. Its dividend payout ratio has declined to a seven-year low of 75.56% currently. Also, NYCB has a decent percentage of institutionally owned shares at 29%. Finally, NYCB posted a healthy free cash flow of $1.3 billion in 2017.
The macro environment shows a good outlook for NYCB. The Federal Reserve is keeping its commitment to hike the federal funds rate 3 times in 2018, so banks will see their profit margins rise as the difference between the prime rate for borrowers and yield for depositors increases. Last month, the Senate passed a banking bill to relax Dodd-Frank restrictions on community banks with assets between $50 billion and $250 billion. As a regional bank that has consistently stayed under the $50 billion threshold, NYCB will be able to grow without the specter of costly compliance with systemically important financial institution (SIFI) regulations like stress testing and resolution plans.
Potential risks of investing in NYCB include the possibility of a correction or bear market in the broad US.. equities market, due to the current threat of a U.S.-China trade war and creeping inflation measures. Although the House of Representatives is expected to eventually pass a version of banking reform that raises the threshold for SIFI designation, there is the risk that Democrats could regain control of Congress in the 2018 midterm elections and repeal the banking bill. However, the events above do not seem likely to happen, and since the S&P 500 has an expensive cyclically adjusted price to earnings ratio of 31.28, NYCB remains an intriguing value play.
The author does not hold any positions in any of the securities above.