Early in 2023, problems at a few banks caused severe damage to regional banks. During that challenging and uncertain time, New York Community Bancorp (NYCB -24.74%) actually performed better than most. The bank shocked investors, however, by reducing the quarterly dividend from $0.17 per share to just $0.05 when it released its full-year 2024 earnings. This indicates that this might not be the best dividend stock for conservative investors—a 70% drop in dividend yield.
How did the dividend of New York Community Bancorp turn out?
Fast-rising interest rates caused a timing issue for certain banks at the beginning of 2023. The bonds that were supposed to be held until maturity were listed on their balance sheets, but due to the quick change in interest rates, their value had decreased. A small number of banks saw a high level of customer withdrawals for a variety of reasons, but there would not have been an issue if the assets had been held to maturity. Due to the need to sell the bonds that had lost value, these banks were suddenly less capitalized than investors had believed.
A few banks went out of business as a result of what was essentially a bank run. Signature Bank happened to be one of those banks. Parts of Signature Bank were acquired by New York Community Bancorp, which intervened. As New York Community Bancorp grew larger as a result, the organization came under increased regulatory scrutiny. This is important because bigger banks have to protect client deposits more effectively.
Meanwhile, a few material loans have caused problems for New York Community Bancorp. To underscore the risk, the management raised the credit loss allowance in the fourth quarter by 60% in just three months, from $619 million to $992 million. That is a sizable shift in a brief amount of time. The important thing to remember from all of this is that there are significant risks involved.
New York Community Bancorp lowered the dividend as a result. This gives it cash that it can use to satisfy its regulators and strengthen its capital structure.
carrying out the necessary tasks.
From New York Community Bancorp’s point of view, it is responding swiftly and forcefully to an issue. In actuality, the bank made the correct choice in most cases by reducing the dividend. Furthermore, it ought to facilitate getting through this difficult period more quickly. That could appeal to a more aggressive long-term investor who is interested in turnaround situations. Additionally, while they wait for management to get the bank back on track, such an investor could be earning a 4.4% dividend yield, assuming the worst is behind the bank.
Nevertheless, until there are more convincing indications of improvement, it might make more sense for cautious dividend investors to hold off. Among other things, these indicators could be the allowance for credit losses leveling off or declining or, better yet, a new dividend increase. The bank is currently still in crisis mode, which is the issue. The company changed the executive reporting structure because of how concerning the issues it is facing are. As executive chairman, it effectively gave one of the board members the authority to make important decisions. It is the typical expectation that the CEO would be engaged in that activity.
Naturally, all of this activity may result in a more promising future. However, these are unsettling times, and it’s probably best for the most adventurous investors to consider New York Community Bancorp. While the bank is not in imminent danger, the current situation tilts the risk/reward profile more toward the risk side of things, which is inappropriate for more cautious dividend investors. Furthermore, fixing the capital structure is probably not going to happen quickly.
Not all compelling narratives are profitable ventures.
It has been fascinating to watch the drama play out regarding the recent events at New York Community Bancorp, which have made headlines. Nevertheless, if investors are hoping to survive on the income their portfolios produce, most don’t want drama and dividends to coexist. In case you’re thinking that things won’t get worse for New York Community Bancorp, you may be partially correct. Nevertheless, you might be mistaken. Things would get much worse for dividend investors if they continued to decline. Most income seekers won’t find the risk worth it.