Updated on February 19th, 2021 by Bob Ciura
Each year, we individually review each of the Dividend Aristocrats, a group of 65 companies in the S&P 500 Index with at least 25 consecutive years of dividend increases. We believe the Dividend Aristocrats list is a great starting point for investors looking for quality dividend stocks to buy for the long-term.
With that in mind, we created a list of all 65 Dividend Aristocrats, with important financial metrics like dividend yields and price-to-earnings ratios. You can download your free copy by clicking on the link below:
Next in the Dividend Aristocrats In Focus series is People’s United Financial (PBCT). People’s most recent dividend increase was its 27th consecutive annual increase, making it one of the newer Dividend Aristocrats. However, for a bank, that is a very strong accomplishment.
People’s United has a strong history of dividend growth, particularly for the highly cyclical financial sector, which saw many of even its largest constituents cut their dividends during the financial crisis. That wasn’t the case for People’s United. In fact, the company continued to increase its dividend each year during the Great Recession.
People’s United managed to increase the dividend again in 2020, despite the coronavirus pandemic negatively impacting the economy.
People’s not only has an impressive streak of dividends, but a very high current yield as well. At a time when the S&P 500 Index has an average dividend yield of 1.5%, People’s United has a 4.5% dividend yield, making it an attractive stock for high dividend income.
People’s was founded in 1842 in Bridgeport, Connecticut. The bank began operations with just $97 in total deposits and had no paid employees for its first 10 years of operations. In the 179 years since that humble beginning, People’s United has grown into a regional bank with almost 400 retail locations in the Northeast United States.
Today, People’s United has assets and loans of $60.9 billion and $45.2 billion, respectively.
Source: Investor presentation
People’s United struggled in 2020 due to the coronavirus pandemic, but this should be no surprise. For the fourth quarter, net interest margin fell from 2.97% to 2.84% sequentially, due to depressed interest rates and excess liquidity. Net interest income declined by 2% in the fourth quarter, from the previous quarter.
On the other hand, non-interest income rose 1% and loan deferrals decreased sharply, from 3.5% to 0.6% of the total loans in the fourth quarter. Overall, operating earnings-per-share declined 5.4% for the fourth quarter, and 5.7% for the full year.
Asset quality, however, is outstanding and affords People’s the ability to have all of its deposits lent out.
Source: Investor presentation
People’s has enjoyed class-leading asset quality over the years, and that continues today. Annualized net charge-offs in the past decade have been just 0.16%, which is well below most of its peers and the class average. This outstanding asset quality means that it has the ability to lend out all of its deposits without fear of high levels of losses.
While 2020 was a difficult year, we view the coronavirus pandemic as a temporary setback to the U.S. economy. People’s United has delivered consistent growth over the long-term and we believe it will continue to do so in the coming years.
While People’s United produces a small amount of organic growth – as just about any other bank would – its strategy instead focuses on acquiring its growth. It has a diversified portfolio of financial services it can offer to customers, but its bread and butter is still core deposit-taking and lending activities.
Source: Investor presentation
Above we can see the myriad acquisitions the bank has made in the past decade. This has helped People’s United bolster its organic branch growth, and as mentioned, earnings have grown steadily over time.
We see People’s United producing 2% earnings-per-share growth annually over the next five years, given that its growth-by-acquisition strategy is lumpy and unpredictable, but also because People’s is subject to the same risks as other banks.
In other words, with interest rates near historic lows, organic growth of earnings is tough to come by for all banks, People’s United included. In addition, since it issues stock for acquisitions, its share count rose over time, introducing a significant headwind for earnings-per-share even if earnings grow.
Still, we see the bank as a strong operator, so we think it has some meaningful growth in front of it, particularly once the coronavirus pandemic ends.
Competitive Advantages & Recession Performance
Competitive advantages are difficult to come by for banks given that they largely offer the same products and services as their competitors. However, one way to offer an advantage is to grow scale in key markets, and that is exactly what People’s is doing with Boston as an example.
Growing scale and name recognition in key markets like that can help drive efficiency and scale, which is part of the reason why People’s has been able to boost margins in recent quarters, despite the flattening yield curve. This key strategic pillar is a differentiator and we think it will serve People’s well in the coming years.
However, that certainly does not insulate People’s from economic downturns. Its performance during the Great Recession was not spectacular, but it did fare much better than many of its larger competitors in the banking industry. People’s earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $0.52
- 2008 earnings-per-share of $0.42 (19% decline)
- 2009 earnings-per-share of $0.30 (29% decline)
- 2010 earnings-per-share of $0.24 (20% decline)
While People’s remained profitable throughout, the damage was significant. Indeed, it was 2011 before People’s earnings-per-share crested its pre-recession high, hitting $0.57 in that year to top 2007’s level of $0.52. Growth has been robust since that time, however, and the company is expected to generate earnings-per-share of $1.33 this year.
Valuation & Expected Returns
People’s has a current price-to-earnings ratio of 11.7 based on our estimate of $1.33 of earnings-per-share for this year. This is slightly lower than our fair value estimate of 13 times earnings, so we see People’s United stock as somewhat undervalued after recent weakness in the stock.
Thus, People’s United stock offers decent value at current prices. Should the stock valuation expand to our estimate of fair value, it would provide a ~2.1% annual tailwind to total returns for shareholders.
In addition, we see earnings-per-share growth at 2% annually. Combined with valuation changes and the current 4.5% yield, total annual returns are expected to reach nearly 9%. This is a solid expected rate of return, which earns a buy recommendation, particularly for income investors interested in the high current yield.
The payout ratio is also just over half of earnings after years of slow payout growth. This was necessary as the company’s payout ratio had previously exceeded earnings, but it is in a much better spot now. Keep in mind that all-stock acquisitions make the dividend costlier even if it isn’t raised on a per-share basis, meaning growth will likely be muted. We are forecasting low-single-digit growth in the payout in the coming years for this reason.
People’s United stock has an attractive dividend yield above 4%, and growth potential for the years ahead. The bank is not immune from economic downturns, and a flat yield curve is a risk. However, People’s United has proven to be adept at finding and acquiring growth in its key markets, and we have no reason to believe that won’t continue.
People’s United stock is appealing for value and income investors due to its decent valuation, strong competitive position in key markets in the Northeast, and its 4%+ dividend yield. For these reasons, we continue to rate People’s a buy for high-yield investors.