May 24th, 2008

Small Banks: MI, BBT

The people at the Wall Street Journal most be reading what I write here. This morning (Saturday, May 24, 2008), on the first page of the Money & Investing section, there’s an article entitled “Small Banks Can Provide Best Dividend” in which it says:

….a number of the smaller players are maintaining their dividends because they’re strong enough to get through this mess with minimal damage. As their stocksfallwith the rest of the financial sector, yields often top 5%, better than the average of the S&P 500, at 1.9%.”

O.K., that’s not exactly the direction I took but it is the Industry I focused on as an area to which the “hot” money will flow as it finishes the energy play. Actually, I’m not even sure I accept the notion that you should buy stocks almost exclusively because of a 5% dividend. Look at the two stocks they recommended (click on symbols below); for each, a 5% dividend equals about 1.1-1.5 points in the price. At that dividend rate, it would take 10-20 years to offset the price erosion that’s taken place over the past 6 months. There’s no way to recoup capital loss through dividends; likewise, there’s no way your portfolio increasing significantly on exclusively dividends.

On May 21, I wrote:

My chart database contains 430+ small banks (excluding National, Foreign and Super-regionals). What a fertile ground for roll-up strategies. The stocks of many, if not most, have been severely damaged by the sub-prime credit problems of the bigger banks. Maybe there’s a new role for them to play in mortgage generation moving forward. But does the country actually need over 400 local banks? Probably not and there’s an opportunity for those with deep pockets to roll them up into 10-20 new national consumer and small business service banks. But what do I know, I’m just a “big picture” dreamer.

The WSJ article identifies two stocks they think have safe dividends (click on symbol for chart):

  • MI (Marshall & Isley)
  • BBT (BB&T Corp)

The Wall Street Journal picked these two because of their yield. But the charts for these two are typical of many of the other 400 regional banks. As a matter of fact, one way to participate, without having to pick individual stocks, is to buy the Regional Bank ETF (RKH), which itself pays a 4.5% dividend. It’s graph, being a composite of many of the larger regionals, looks similar to the above two. You can monitor this ETF and, when it looks like it’s this symmetrical triangle is actually a base rather than just a consolidation on a move further down, you can zero in on some of the best regional bank stocks.

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