Today, the company has increased dividends for 3 years in a row. M&T Bank kept dividends unchanged during the financial crisis, and only recently started raising them again. The bank took some TARP money, and is one of the few, if not the only TARP recipient that didn't cut dividends during the financial crisis. This is impressive, and is a testament to the strong management, which also did a very good job of keeping to a conservative loan approvals process. Most of the other major financial institutions ended up cutting or eliminating dividends. For example, everyone seems to like J.P. Morgan (JPM) today. However, J.P. Morgan cut its dividends during the financial crisis to maintain liquidity.
The last dividend increase was in August 2018, when the company raised is quarterly dividend by 25% to $1/share. Unfortunately, the board of directors has missed the opportunity to raise dividends in August 2019. In their defense, they raised dividends twice in 2018. If they raise dividends anytime by the end of 2020, the company will establish a five year track record of annual dividend increases.
Between 2008 and 2018, the bank has managed to boost earnings from $5/share to $12.74/share. The company is expected to generate $13.82/share in 2019.
M&T Bank has delivered strong performance because of its excellent underwriting, efficient operations, and acquisitions.
The company had a large exposure to real estate loans during the financial crisis, but stayed afloat and was one of the few financial institutions that did not cut dividends between 2007 and 2009. Rather, it maintained dividends unchanged, and recently started increasing them.
That’s because the company has sound underwriting standards, and focuses on risk adjusted yields, rather than chasing business and yield.
In the short-term, the decrease in interest rates and the interest rate inversion will be a headwind to profits. That would be offset by long-term growth in deposits and loans. The business is highly cyclical, and exposed to the ups and downs of the economy. During the next recession, the amount of loans will decrease, and the amount of charge-offs will increase. A company like M&T Bank with sound underwriting will experience a lower drop in profitability than peers. I like the deposit base, which tends to grow over time, and provides a float like instrument for the bank to use, as the average depositor is not earning much from their accounts. The decrease in interest rates will increase refinancing of loans, which could shrink interest margins in the short-run.
There has been a change at the top, as the long-time CEO who instilled the culture of smart underwriting died in 2017. However, many analysts believe that the people that remain at the bank have been trained under the right culture, and will continue doing the right thing.
Approximately one-third of business is in fee-based products, which scale well.
An increased penetration of online banking will result in a lesser need for branches, which could reduce costs, and increase profits down the road.
The number of shares outstanding has increased between 2008 and 2018. Since 2016, the bank has managed to use share buybacks to reduce the number of shares outstanding. The general growth in shares was due to major acquisitions done in 2011 and 2015. M&T Bank could likely continue its long-term earnings growth through strategic acquisitions done at the right price.
The dividend payout ratio has been declining over the past decade, as earnings per share have been increasing, while the dividend was mostly flat during that time period. I believe that there is ample opportunity for M&T Bank to boost dividends above the rate of earnings growth over the next decade. The bank’s dividend is safer than other financial institutions, because they haven’t raised it as much.
Overall, I find M&T Bank to be attractively valued at 11.60 times forward earnings. The bank has a yield of 2.50% today, which is well covered. There is ample room to grow future dividends down the road over the next decade.
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