I'm no stranger to companies that are facing short-term problems. I often buy shares of such businesses because the headwinds they face have resulted in attractive stock prices and high yields. New York Community Bancorp(NYSE: NYCB) attracted my attention at first, but it quickly became clear that this regional bank's troubles are too deep for me to bother with the stock. Here's why.
What I like to find in a stock
When I'm considering investing a stock, I prefer to focus on companies with strong businesses that appear to be temporarily out of favor on Wall Street. My main process for finding such companies is to first look for ones with long histories of annual dividend increases, which I believe is a rough indicator of a strong business. Then I pull out those with historically high dividend yields, which I consider an approximate measure of value.
What I try to figure out at that point is why the dividend yield is so high. There are times when a high yield indicates a fundamental problem with the business. That's what keeps me away from Altria, given the ongoing declines in its most important business (cigarettes). But then there are other companies where the issues being faced seem likely to be temporary. An example of that in my portfolio would be Bank of Nova Scotia, which has been trying less than successfully to expand in South America. Due to its strong Canadian foundation, I bought in. Now, it has a plan to refocus on only the best markets in South America. I'm fine with that and my thesis for owning it still holds up.
I'm even willing to continue owning companies that seem like they are in a bad place, like Toronto-Dominion Bank. This bank's money-laundering headwind is very real and will likely be accompanied by large fines and legal costs. And management's growth plans in the United States, where it operates a large regional bank, are likely to crawl to a near halt for a little bit. Again, given its solid Canadian business and long history of success, I'm OK with holding on. Notably, both Bank of Nova Scotia and Toronto-Dominion Bank have paid uninterrupted dividends for over 100 years.
The problem with New York Community Bancorp
So clearly, I don't have a problem owning banks that are working through difficult situations. And I initially looked at New York Community Bancorp when it started to falter. After all, it took the 2023 bank run scare in relative stride. And the yield was attractive and in the mid-single digits at one point. But the list of positives ended pretty quickly.
For example, New York Community Bancorp does not have a long history of increasing its dividend. In fact, it cut the dividend in 2016. And then it reduced the dividend to a mere token $0.01 per share per quarter in 2024 after its current problems became acute. In other words, the bank didn't live up to my most basic expectations on the dividend front.
That said, I found the story interesting and kept watching. The reason for the second dividend cut was really fascinating, but not in a good way. Basically, New York Community Bancorp bit off more than it could chew. In late 2022, the bank acquired Flagstar Bank. And then, in 2023, it stepped in to buy assets from Signature Bank, one of the banks that failed during the 2023 bank run. At first I thought that was a sign of strength, but it turned out to be the straw the broke the camel's back. New York Community Bancorp grew more quickly than it was capable of managing.
When that became apparent, the company replaced its leadership team in an ugly multistep process. It needed to get a $1 billion lifeline. And it put in place a multiyear turnaround plan that won't come to fruition until late 2026 at the earliest. I don't mind owning a well-run company that's working on a turnaround, which is what I bought when I added Procter & Gamble to my portfolio several years ago as it was jettisoning smaller brands to focus on its core consumer product portfolio. But New York Community Bancorp's woes are deeper and it is floundering badly. The risk-to-reward ratio, especially now that the dividend is effectively gone, just doesn't line up with my investment goals.
New York Community Bancorp is a high-risk turnaround stock
To be fair, given the $1 billion lifeline, New York Community Bancorp's turnaround looks highly likely to play out in a positive way, even if it doesn't go exactly according to plan. But it is clear that the troubles here run very deep, with the company needing to upgrade its internal controls while also dealing with growing problems in its loan portfolio. I wouldn't say that it is an uninvestable stock, it just isn't one that a more conservative investor like myself should be looking at. New York Community Bancorp is a high-risk, high-reward turnaround play that only the most aggressive investors should consider. Everyone else should stay at least 10 feet away.
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Reuben Gregg Brewer has positions in Bank Of Nova Scotia, Procter & Gamble, and Toronto-Dominion Bank. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.
