It was a rather volatile first half of the year for financial stocks, particularly banks. That has created some buying opportunities for investors, as valuations have come down.
But some financial stocks have been able to not only maintain their dividends but also raise them. In the third quarter, two companies did just that: Broadridge Financial Solutions(NYSE: BR) and Regions Financial(NYSE: RF). Let's examine the dividends of these two stocks and determine if these stocks would make good additions to an income-focused investment portfolio.
1. Broadridge Financial
Broadridge Financial provides public companies with investor communication materials like proxy statements, annual reports, quarterly reports, prospectuses, and other shareholder documents.
It is the leader in this space, and the services it provides are mandated for all public companies by the Securities and Exchange Commission (SEC), so this is a very durable business that generates mostly fee-based revenue. That, in turn, creates a steady flow of repeatable income and lots of cash, which is great for maintaining a dividend.
It just wrapped up its fiscal year on June 30, and it had a 6% increase in total revenue, a 7% year-over-year increase in recurring revenue, and a 16% increase in earnings per share. Its operating margin of 15.4% was up from 13.3% the previous year.
It ended the fiscal year with $748 million in free cash flow, more than double the $370 million in the previous year.
This enabled Broadridge to increase its dividend in the current quarter by 10% to $0.80 per share. This is the 15th straight year that the company has boosted its payout. It currently has a yield of 1.8% and a payout ratio of 41%.
Broadridge is a strong candidate to continue increasing its dividend with recurring revenue growth of 6% to 9% in fiscal year 2024, along with a projected adjusted operating margin of 20%, up from 18.7% the previous fiscal year, and adjusted EPS growth of 8% to 12%.
This consistency speaks to its strength in its niche market and its durable business. Also, on Aug. 17, it announced in an SEC filing that it had entered into a $1.3 billion revolving credit facility to give it added liquidity and to pay down debt.
2. Regions Financial
Regions Financial is the holding company for Regions Bank, the nation's 26th-largest bank with about $155 billion in assets under management.
Regions Financial's stock price is down 14% this year, but it has outperformed most of its regional bank competitors, as the KBW Nasdaq Regional Banking Index is off about 20% year to date as of Aug. 22.
The company was an outlier as it saw revenue climb 12% year over year to $2 billion, led by a 24% increase in net interest income to $1.4 billion. Its net interest margin was up almost 100 basis points to 4.04%, from 3.06% in the second quarter of 2022.
While high deposit costs caused net interest income to decrease slightly from the first quarter of 2023, a surge in noninterest income allowed Regions to post a slight revenue gain over the first quarter of 2023.
The bank managed to increase its liquidity in the second quarter, as its common equity tier 1 (CET1) ratio climbed to 10.2% in the quarter, which is comfortably beyond the regulatory minimum. That is up from 9.9% in the first quarter and 9.1% in the second quarter of 2022.
Another key measure for banks is their efficiency ratio, which is the cost to generate $1 of income. Regions was a very efficient 56.4% in the quarter, which was up from 52.3% in the first quarter, and better than most.
Regions was able to easily boost its dividend by 20% in the quarter to $0.24 per share. It has a high yield of 4.95% and a reasonable payout ratio of 32.7%. It has now boosted its dividend for 10 consecutive years.
Are these dividend-payers worth buying?
I think these are both excellent dividend stocks. Regions has been one of the most consistent banks in the country over the years, as its streak of dividend increases would attest. Even last year, with the market down 19%, Regions managed to eke out a 2% year-to-date return.
It is very cheap right now with a price-to-earnings (P/E) ratio of 8, but it is in much better shape than many of its peers, as its second-quarter numbers show. Regional banks could face some near-term turbulence, but as a long-term buy, and for its excellent dividend, it is a worthy option.
Broadridge is up some 33% this year and has been a stellar growth stock over the years, with a 10-year annualized return of 19.3%. Its strength and dominant presence in its market -- with the stability that comes from having a built-in market of public companies that must generate shareholder materials -- make it a fantastic business.
The valuation is a bit high with a P/E of 33, but it is not outside of its recent historical range. As for its dividend, the yield is not as high as Regions', but it looks very solid based on its revenue generation, cash flow, and history.
I think both of these stocks are worth a look as long-term investments and for their steady dividends.
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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadridge Financial Solutions. The Motley Fool recommends Regions Financial. The Motley Fool has a disclosure policy.
