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The Smallest Dividend King: Growth & Acquisitions


Published on September 15th, 2016 by Ben Reynolds

Dividend Kings tend to be large, well-established blue-chip businesses.  Companies like Johnson & Johnson (JNJ), Coca-Cola (KO), and 3M (MMM) come to mind.

It makes sense that the typical Dividend King is a large cap stock; after all, increasing dividend payments for 50 consecutive years is a feat that shows prolonged growth.  Prolonged growth leads to larger businesses.

Only 18 publicly traded stocks have managed to increase their dividends for 50 or more consecutive years.  You can see all 18 Dividend Kings here.

There is one Dividend King with a market cap of under $500 million.  This company is Farmers & Merchants Bancorp (FMCB) [referred to hereafter as F&M Bank].

Not only is F&M Bank the smallest Dividend King, it is also one of the newest.  The company reached 50 consecutive years of dividend increases in 2015.

This article explores the investment prospects of F&M Bank, the smallest Dividend King.

Company Overview

F&M Bank was founded in 1916 in California.  As of its most recent quarter, this regional bank has $2.691 billion in assets on its balance sheet.

Over the last 100 years, F&M Bank has slowly expanded from 1 location in California to 24.  The image below shows the company’s locations (all of which are in California).

fm-bank-locations

Source:  F&M Bank

F&M Bank has historically grown very slowly, but that may be changing soon…

Growth Prospects

F&M Bank has historically not appeared to be particularly interested in growth.  The company’s shares are thinly traded and closely held.

The company appears to have found a renewed resolve to grow, however.

F&M Bank had not made an acquisition since 1985, until recently.  According to this article which discusses F&M Bank CEO Kent Steinwert’s plans, the company is:

“Now planning to grow through more acquisitions and new branch openings.”

On June 8th, F&M Bank announced it will acquire Delta National Bancorp for around $6.6 million.  The move will add 4 new bank locations to F&M Bank – which is 17% growth in its location count.  All locations are still in the state of California.

The company expects the acquisition to close at the end of 2016.  The acquisition is expected to be accretive to earnings in 2017, the first full year of the acquisition.

This acquisition is highly unusual for F&M Bank.  It shows the company’s new push for growth.  F&M Bank does have plenty of room to grow given its small size.

The company also fairly recently expanded its location count from 22 to 24 with new locations in the San Francisco Bay Area.

With the companies small location count, F&M Bank has plenty of room for continued geographic expansion in California.

Recent Results

F&M Bank posted solid results in its most recent quarter.  The company saw earnings-per-share grow 7.7% versus the same quarter a year ago.

CEO Kent Steinwert said the following about the results:

“We are very pleased with the Company’s continuing strong performance in the second quarter  of 2016, particularly given that we have begun to incur expenses in connection with our recently  announced acquisition of Delta National Bancorp and its subsidiary Delta Bank, N.A. The Delta  transaction is scheduled to close in the 4th quarter of 2016.  We  remain positive in our outlook for the second half of 2016 as continuing growth should be supported by our acquisition of Delta, and what appear to be signs of a strengthening economy in the Central Valley.”

The company also increased its dividend payments for the 51st consecutive year in May.  It was not only the 51st consecutive increase, it was also the 81st consecutive year of dividend payments for F&M Bank.

The increase was weak; a 2.3% bump.  F&M Bank pays dividends once every 6 months, not quarterly.  The company’s stock currently offers investors a yield of 2.2% based on dividends paid over the last 12 months.

The small dividend increase is less than earnings-per-share growth.  Management appears to be focusing on collecting cash for future growth.  The image below shows the company’s declining payout ratio over the last 5 years:

fmcb-payout-ratio

How Fast Will F&M Bank Grow?

F&M Bank is conservatively run.  The company’s total bank capital to risk weighted assets for fiscal 2015 was 12.2%.  Regulatory requirements were 8%, and ‘well capitalized’ requirements were 10%.  F&M Bank was 22% above the top-tier ‘well capitalized’ regulatory rank in fiscal 2015.

The company’s return on equity has been above 11% a year every year for the last 5 years, and it has kept its payout ratio at around 40% (slowly declining).  If the company’s return on equity stays at 11% and it continues to reinvest 60% of its earnings a year, it will grow at 6.6% a year.

But, management has been a net issuer of shares over the last 5 years – and this trend will likely continue.  The company’s share count has grown by 2.3% a year on average.

Factoring in share dilution, F&M Bank will likely grow shareholder wealth at somewhere between 4% and 5% a year.  Adding in dividends gives the stock an expected total return of around 7% a year.

Final Thoughts

F&M Bank has a long history of rewarding shareholders with rising dividends.  The bank appears to be focusing on growth more now than at any point in the last 30 years.

Due to its small location count, F&M Bank has a large growth runway ahead if it can effectively compete with larger rivals.  The company is very conservatively financed, and offers decent total return potential.

F&M Bank does not rank particularly highly using The 8 Rules of Dividend Investing due to its mediocre yield and mediocre growth prospects.  The company is currently trading for a price-to-earnings ratio of 16.4, which is a bit high for the regional banking sector in today’s current environment.  The median price-to-earnings ratio for Pacific United States banks is currently 15.4.


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