Over the past two decades, New York Community Bancorp (NYSE: NYCB) developed something of a cult following among dividend investors and bank stock aficionados. It earned this reputation honestly, as its stock has returned more than 4,000% since its initial public offering in the mid-1990s, beating its peer group by a factor of 10.But there's reason to believe that the New York-based bank may be losing its luster.
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Despite making it through the financial crisis virtually unscathed, a testament to its business model, its stock has lagged far behind the industry.The total return on New York Community Bancorp's stock including dividends over the past five years is half that of the KBW Bank Index, which tracks large-cap bank stocks. Its return over the past three years equates to a mere third of the widely tracked index. And most tellingly, while the average big bank stock has soared 30% since the presidential election, New York Community Bancorp's stock has climbed only 10%.What was once an industry darling is thus now an industry laggard.
Relative to other bank stocks, New York Community Bancorp has been hammered over the past few years. Image source: Getty Images.
An ill-conceived merger
It's tempting to attribute all of this to bad luck, a temporary fall from grace caused by external factors as opposed to an internal problem at the bank. This is in fact exactly how New York Community Bancorp's executives see things. On its latest earnings call, CEO Joseph Ficalora responded to a question about its lagging stock price by saying that it was a "momentary consequence of some of the things that are happening externally... either interest rates or regulatory or other things that are happening in the marketplace."
But the problem with Ficalora's explanation is that it's not entirely accurate. The reason New York Community Bancorp's stock is trailing the industry seems to trace instead to its decision in October 2015 to merge with Astoria Financial (NYSE: AF), a $15 billion bank operating in the same region. New York Community Bancorp's shares tanked following the announcement, dropping by 23% over the next three months.There were two issues with the deal. First, it would dilute the business model that had powered New York Community Bancorp's once-extraordinary returns. Second, it required the bank to cut its once-resplendent dividend by a third -- something it didn't even have to do in the darkest days of the financial crisis.
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On earnings calls before the deal, the bank's executives habitually touted how many consecutive quarters it had paid out $0.25 a share to its stockholders. When it came to cutting the dividend, however, they weren't nearly as forthcoming, burying the news in the final paragraph of a dense press release. "Based upon an anticipated dividend payout ratio of 50% upon completion of the merger, we have decided, going forward, to reallocate $0.08 cents per share from our traditional dividend payment to support our future growth and capital strength," Ficalora said in prepared remarks. "Accordingly, our expected dividend will be $0.17 per share, subject to regulatory approval, beginning in the first quarter of 2016."
To be fair, the decision to cut its dividend was unavoidable. Because the merger would put New York Community Bancorp above the $50 billion threshold in terms of the assets on its balance sheet, the bank would become a systemically important financial institution. As such, it would be subject to a host of heightened regulatory standards, including the Federal Reserve's caps on dividend payouts, which kick in at between 30% to 40% of a bank's earnings. This made New York Community Bancorp's approximately 90% payout ratio unsustainable.
The net result is that the proposed merger promised to fundamentally transform the nature of an investment in New York Community Bancorp. It would be riskier, because the bank would be diversifying away from its tried-and-true model of financing rent-controlled multifamily apartment buildings in New York City, which rarely if ever have vacancies. It would hurt New York Community Bancorp's notoriously low efficiency ratio -- noninterest expenses as a percent of net revenue -- because it would inherit Astoria Financial's network of nearly 90 branches. And it was a direct affront to the bank's long-term investors, who had come to rely on the bank's purported commitment to maintaining its quarterly payout.
Given all of this, you'd be excused for thinking that New York Community Bancorp's stock should have shot up when it was revealed in December that the merger was off. But that hasn't been the case. While other bank stocks have continued to extend their all-time highs, New York Community Bancorp's stock dropped 11% after the revelation, causing it to miss out on the bump in bank stocks following the presidential election.
In my opinion, there are three reasons for this. The first is that New York Community Bancorp's management is losing credibility. It was a bad deal that shouldn't have been considered in the first place. And then when it was announced, the bank's executives should have been up front about the impact on its dividend. They had, after all, spent years leading investors to believe that its quarterly payout was sacred.
The second reason is that, not unlike the way it dealt with its dividend cut, New York Community Bancorp's executives have all but refused to address why the merger was called off. Excluding the boilerplate language that's appended to every press release, the bank's formal announcement terminating the merger contained a single sentence. Literally one sentence. Here's what it said:
New York Community Bancorp... and Astoria Financial... today announced that their boards of directors have mutually agreed not to extend the companies' definitive merger agreement, and to terminate the agreement effective January 1, 2017.
One is left to speculate about why New York Community Bancorp didn't explain why it abandoned the deal. Maybe it wasn't comfortable admitting its mistake? Or maybe it was because, as analysts and commentators seem to believe, regulators wouldn't approve the deal. If that's the case, then there's reason for New York Community Bancorp's executives to be embarrassed, as it's relatively uncommon for banks to have to withdraw merger applications after they've been submitted for regulatory approval -- typically less than one in five are withdrawn.
The final reason that New York Community Bancorp's stock hasn't bounced back is that the bank is so much less efficient today as a result of its preparations for the merger. In 2010, its efficiency ratio, which the bank refers to as a "hallmark of the company," was 44.5%. That was one of the best ratios in the entire bank industry. Fast-forward to today, however, and it's grown to 60.6% -- a mediocre figure compared to other banks and a shockingly high one for a bank that's structured like New York Community Bancorp.
Ultimately, it seems clear that investors will continue to be left in the dark about New York Community Bancorp's plans. Its executives have made a habit of avoiding the media. And even when they do make important announcements, they either bury the lede, so to speak, or issue such a perfunctory statement that investors are left to fill in the blanks themselves.
In short, there are too many unanswerable questions surrounding New York Community Bancorp to make its stock attractive to rational investors.
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