Dividend Kings In Focus: Farmers & Merchants Bancorp - Sure Dividend

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Dividend Kings In Focus: Farmers & Merchants Bancorp

Updated on October 4th, 2021 by Bob Ciura

The Dividend Kings consist of companies that have raised their dividends for at least 50 years in a row. Many of the companies have turned into huge multinational corporations over the decades, but not all of them. You can see the full list of all 32 Dividend Kings here.

We also created a full list of all Dividend Kings, along with relevant financial statistics like dividend yields and price-to-earnings ratios. You can download the full list of Dividend Kings by clicking on the link below:


Click here to download my Dividend Kings Excel Spreadsheet now. Keep reading this article to learn more.

Farmers & Merchants Bancorp (FMCB) has paid uninterrupted dividends for 86 consecutive years and has raised its dividend for 56 consecutive years. And yet, it has remained a relatively small company, trading at a market capitalization of just ~$700 million.

Despite its small size, the company has many things going in its favor, and shareholders are likely to see solid returns going forward. The stock’s 1.7% dividend yield is higher than the broader market’s 1.3% yield, and there is room for more dividend raises down the road.

Business Overview

F&M Bank was founded in 1916. It operates 32 branches across the Central Valley and East Bay areas in California. F&M Bank is a full service community bank and thus offers loans, deposits, equipment leasing and treasury management products to businesses, as well as a full range of consumer banking products.

In spite of operating just 32 branches, F&M Bank has grown its asset base significantly over time. F&M faced a major challenge last year due to the coronavirus crisis, which caused a severe recession and rendered many individuals and companies unable to service their loans, at least in the short term.

However, thanks to its conservative management, F&M Bank exhibited remarkable resilience amid the pandemic. While most banks recorded significant loan loss provisions due to the pandemic in the second quarter, F&M Bank booked much lower provisions for loan losses.

The company is conservatively managed and, until five years ago, had not made an acquisition since 1985. However, in the last five years, it has begun to pursue growth more aggressively. It acquired Delta National Bancorp in 2016 and increased its locations by 4. Moreover, in October2018, it completed its acquisition of Bank of Rio Vista, which has helped F&M Bank to further expand in the San Francisco East Bay Area.

In late July, F&M Bank reported (7/26/21) financial results for the second quarter of fiscal 2021. Despite the pandemic and the suppressed prevailing interest rates, the bank grew its earningspershare 13.4% over last year’s quarter, from $18.03 to $20.45. It has thus achieved record earningspershare of $79.83 in the last 12 months.

Net interest income grew 12.5% thanks to 5.5% growth in loans and higher yields in new loans while deposits grew 17%. F&M Bank has booked provisions for loan losses equal to only 2.0% of its total portfolio thanks to its conservative portfolio.

Despite the risk from the variants of the coronavirus, management remains optimistic for this year thanks to the sustained business momentum. We reiterate that F&M Bank is one of the most resilient banks to the pandemic.

Growth Prospects

As previously mentioned, F&M Bank has pursued growth through acquisitions over the last several years after a long period of no acquisition activity stretching back to the 1980’s. It acquired Delta National Bancorp in 2016 and thus it increased the number of its locations by 4. Moreover, in late 2018, it acquired Bank of Rio Vista and thus expanded in the San Francisco East Bay Area.

F&M Bank has grown its earnings per share at an 11.3% average annual rate over the last decade. However, it has enjoyed some non-recurring tailwinds over this period. In 2018, the bank benefited from a steep reduction in the corporate tax rate and grew its earnings per share by 60%. In addition, in 2019, it greatly benefited from its acquisition of Bank of Rio Vista. As a result, investors should not count on double-digit earnings growth in the upcoming years.

Moreover, just like all the other banks, F&M Bank is currently facing a headwind due to the record-low interest rates that have resulted from the response of the Fed to the pandemic. The economy has begun to recover from the pandemic in the third quarter but it will probably take years for the unemployment rate to return to its pre-pandemic level. It is thus conservative to expect suppressed interest rates in the next few years.

Low interest rates are a headwind for banks and individuals with high amount of assets that therefore earn low returns. Moreover, when interest rates are low, the spread between the lending rate and the borrowing rate of banks shrinks and thus compresses their net interest margin, which is a key component of their earnings.

Overall, we expect F&M Bank to grow its earnings per share by approximately 5% per year over the next five years thanks to the consistent growth of its asset and loan portfolios, a possible increase in the number of its physical locations and higher interest rates over this time horizon.

Competitive Advantages & Recession Performance

F&M Bank is not a big bank at all — the company’s market cap is just several hundred million dollars. The bank nevertheless has been a solid performer for a very long time, and it remained stable during the last financial crisis

F&M Bank’s net earnings declined minimally during the 2008-2009 recession, with profits dropping by about ten percent. That is a huge contrast to what other banks had to report during that time. Earnings-per-share during the Great Recession are below:

Major banks suffered earnings declines of 80% or even more during the last financial crisis. F&M Bank, with its focus on community banking and not on more speculative, riskier businesses, has been a much safer investment during those troubled times.

As F&M Bank has not made any changes to its business model since then, it is still exceptionally resilient to recessions, at least relative to most banks. The bank currently has a tier 1 capital ratio of 9.6%, which results in the highest regulatory classification of “well capitalized”, and has extremely few non-performing loans. It is thus one of the most resilient banks in the ongoing downturn caused by the pandemic.

The conservative management of F&M Bank results in slower growth during periods of economic growth but results in higher long-term returns thanks to the superior returns during rough economic periods, when most banks see their earnings collapse. The prudent management of F&M Bank also helps explain its exceptional dividend growth streak. Most banks operate with high leverage. Consequently, their earnings slump during downturns and thus they cannot sustain multi-year dividend growth streaks.

F&M Bank is a low beta stock. This means that the stock price does not decline much in a market downturn, which makes F&M Bank a relatively stable, non-volatile holding. This feature is paramount during broad market sell-offs, as it makes it easier for investors to avoid panic selling and maintain a long-term investing perspective.

Valuation & Expected Returns

Based on a share price of $896 and expected earnings per share of $84.00 this year, F&M Bank is trading at a price-to-earnings ratio of 10.7.

The stock has traded at an average price-to-earnings ratio of 14.3 over the last decade but we assume a fair earnings multiple of 12.0 due to the small market cap of the stock. If F&M Bank reaches our fair value estimate over the next five years, it will enjoy a 2.3% annualized gain in its returns thanks to the expansion of its valuation level.

Total returns are also comprised of share price gains and the dividends a stock pays. F&M Bank currently yields 1.7%, which is higher than the S&P 500’s average dividend yield.

Given 5% expected earnings-per-share growth, the 1.7% dividend and a 2.3% annualized expansion of the price-to-earnings ratio, we expect F&M Bank to offer a 9% average annual return over the next five years.

Final Thoughts

Due to its small market cap, F&M Bank passes under the radar of most investors. This is unfortunate, as F&M Bank is an exceptionally well-managed company, which has also begun to pursue growth aggressively in the last few years.

Thanks to its resilience to recessions, F&M Bank offers a compelling risk-adjusted expected return and thus it is an attractive candidate for those who want to gain exposure to the financial sector.

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