Mid-Cap US Banks With Strong Dividends

Published Fri, 29 Jan 2016 12:00 CET by DividendYields.org

Investors often seek for dividend growth in mid-cap stocks because they offer a better growth expectation than the large caps. Although large-cap stocks come to mind when considering solid business models, low earnings volatility, and sustainable dividends, there are mid-caps that can do equally well. I have never been exclusively focused on this area.
The recent speculation regarding the proper timing for a QE (quantitative easing) from the U.S. central bank and the increased strain for the declining Chinese financial system, have both led to an increased level of market volatility. This article discusses three mid-cap, growth-oriented U.S. banks with a proven ability for revenue growth and free cash flows. Coupled with strong management that delivers long-term dividend growth, these mid-cap stocks are worth considering, in spite of the volatile market conditions.

Citizens Financial Group, Fifth Third Bancorp and KeyCorp YoY Stock Performance Graph
Citizens Financial Group (NYSE: CFG) is the bank holding company for Citizens Bank and Citizens Bank of Pennsylvania. Headquartered in Rhode Island, the group provides retail and commercial banking products and services through its Consumer Banking and Commercial Banking segments across the United States. The group’s network comprises of 1,200 branches in 11 states as well as nearly 100 retail and commercial non-branch offices located in 11 other states.

Strong Q4 2015 Results: Heading to 2016, Citizens Financial Group ended the year with a strong fourth quarter. The group achieved 3% operating leverage and 8% average loan growth (from 6% in Q4 2014) as a result of higher average interest-earning assets, lower credit provisions, and better securities yields. The results also include a strong capital position - CET 1 ratio 11.2% to 11.5% - as well as core fee income growth 7% from 5%. Provision normalization was within the range of $375 to $425 million. The group has also seen growth in commercial real estate loans as a result of an aligned corporate finance strategy, which helped mitigate some of the reductions in the middle market as middle-income borrowers continue to lower line utilization.

Strategic Initiatives: Citizens Financial implements a clear plan on gaining operational excellence through the launch of a new hedge fund. By driving its key strategic initiatives, the Group is expected to deliver an improved core fee income growth and a better level of revenue growth in 2016. Furthermore, by continuing to seek for growth initiatives, the group is expected to lower expense growth and drive growth in earnings. In addition, working towards a capital surplus through loan growth is one of the Group’s main strategic edges.

Dividend Strength: Citizens Financial delivers an annualized dividend of $0.40 per share, yielding 1.89% at a payout ratio of 26%.

Fifth Third Bancorp (Nasdaq: FITB) is an Ohio-based diversified financial services company offering a range of retail and banking products and services across the United States. Through its Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors segments, Fifth Third provides cash management, asset management, and insurance services, among others. The company’s network comprises of 1,302 full-service banking centers, including 101 Bank Mart locations, as well as 2,638 automated teller machines in 12 states throughout the Midwestern and Southeastern regions of the United States.

FY 2015 Results: 2015 was a remarkable year for Fifth Third Bank. The bank’s results were mainly driven by its focus on enhancing its risk and compliance infrastructure as well as investing in new business. This led to 1.22% return on assets and 11.3% return on common equity. Although full year net interest income was relatively flat – down 1% – core fee income growth was 3%. On this basis, Fifth Third Bank seeks to add growth-oriented products in its top line aiming to strengthen customer relationships. In addition, the bank intends to lower its dependence on more volatile spread income products and complement its already established line with an integrated bank-owned insurance program. This will allow the company to explore new areas of business as an opportunity for expansion.

Shareholder Returns: To maximize returns to its shareholders, Fifth Third Bank maintains a significant ownership stake. For 2015, the bank has returned 42% of its earnings back to its shareholders through share buybacks. Furthermore, Vantiv, Fifth Third Bank’s payment processing provider, continued to be a significant source of shareholder returns. The bank has reduced its direct ownership stake in Vantiv as well as a significant amount volatility related to its warrant position. The Vantiv proceeds for 2015 were used towards the repurchase of 9.25 million common shares, thereby enabling Fifth Third Bank to return an aggregating 78% of its earnings to its shareholders.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Citizens Financial Group 21.74 19.73 28.71 10.19% -24.28% 11.19 13.68 0.95 - 26%
Fifth Third Bancorp 15.57 14.90 21.93 4.50% -29.00% 12.08 7.67 1.00 1.00 26%
Keycorp 11.08 10.78 15.70 2.78% -29.43% 9.14 10.34 0.95 1.25 30%

KeyCorp (NYSE: KEY) is an Ohio-headquartered holding company that offers a range of retail and commercial banking services to individual, corporate, and institutional clients across the United States. The company offers personal finance, business advisory, and asset management services as well as investment and cash management products through a network of 994 retail banking branches and 1,287 automated teller machines in 12 states, as well as a telephone banking call center.

FY 2015 Results: For 2015, KeyCorp’s net interest income was up 3% YoY, whereas its pre-provision net revenue was up 5% YoY. The company’s strong operating leverage places it among the leaders in the industry, reflecting its continuous focus on building effective customer relationships and expanding its network. In fact, new clients contributed 5% growth in average loans and 12% growth in CF&A balances. Average loan balances were up $3 billion compared to Q4 2104, mainly driven by commercial, financial, and agricultural loans while average CF&A loans were up $3.7 billion. KeyCorp has also increased its core fee income by about 12%, while its corporate services and payments were both up 10%.

Future Outlook: For 2016, Beth Mooney, KeyCorp CEO and the only woman so far leading one of the top 20 American banks, is determined to continue investing in opportunities that can improve the company’s operational efficiencies. The upward trend is expected to continue with driven growth and profitability as well as merger and acquisitions that can add shareholder value. Currently, KeyCorp delivers an annualized dividend of $0.32 per share, yielding 2.93% at a payout ratio of 30%. Given the company’s focus on growth opportunities and cost-efficiency plan, the dividend is expected to increase.