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Why This Small-Cap Bank Hiked Its Dividend 2 Quarters in a Row

Billy Duberstein, The Motley Fool

If you like companies whose dividend payouts rise every year, you'll love what this top-performing small-cap bank just did.

Home BancShares (NASDAQ: HOMB) is based in Conway, Ark., with branches across Arkansas, Florida, and Alabama, and a single location in New York City. Twenty years after its founding, its market capitalization is still just $3.2 billion, but it has been ranked No. 1 on Forbes' Best Banks in America list two years in a row. 

And Home BancShares just did something else for the second time in a row: hike its dividend. But this wasn't the second hike in a year, it was the second hike in two quarters. Home Bancshares just declared a $0.13 quarterly payout to take place in June. That's a one-penny increase over last quarter's $0.12 payout, and a two-penny increase over the $0.11 payout in the quarter prior to that. The ex-dividend date is May 13, so investors still have time to buy the stock prior to the increased payment.

Normally, even great dividend growth stocks hike their payout only once per year. So why is Home BancShares being so generous so often?

A hand draws an upward sloping blue line next to the word dividends written in blue.

Image source: Getty Images.

Because it can

Home BancShares has already been generous in terms of total shareholder return, but over the past few quarters it has chosen to spend most of its earnings on share repurchases, not big dividend increases. Even with the recent dividend hike, Home BancShares' dividend yield stands at 2.7%, which is pretty solid but nothing earth-shattering, and its dividend payout ratio stands at only 26.5% of its net income, leaving plenty of room for more increases.

Bank stocks in general have been punished as the yield curve has narrowed over the past year, and Home BancShares' executive team maintains its stock is undervalued. That's why management has leaned on repurchases recently instead of dividends. Home BancShares repurchased about $104.3 million of its stock in 2018 and a whopping $51.7 million last quarter, when bank stocks were under pressure. That $51.7 million made up about 72.5% of the company's net income. Since the stock has risen a bit over the past quarter and there are now fewer shares outstanding, perhaps management wanted to balance things a bit more toward dividends.

Management shares the spoils

Another attractive aspect of Home BancShares is its relatively high inside ownership. Chairman and co-founder Johnny Allison owns almost 4% of the company's stock, worth about $130 million. All the officers and directors combined own about 8.7% of shares outstanding.

While 8.7% of company shares isn't the highest insider ownership one will see, it's still pretty good, especially since the company regularly issues shares to fund its growth-via-acquisition strategy. Over the past 20 years, Home BancShares has completed 23 acquisitions as it's grown from a small Arkansas bank to a fairly large regional player.

Many executives have been with Home BancShares either since the company's founding or at least since the time their bank was acquired. Since insiders do own a fair amount of stock, their interests are aligned, and they are likely enjoying the increased payout as well.

An ulterior motive?

As mentioned, Home BancShares has mostly grown via acquisition in order to reach the size it is today. Usually, the company has issued shares as part of the buyout of another firm. With bank stocks today trading at a discount to the larger market and other Southern regional banks aggressively looking to merge, the time may be ripe for Home BancShares to make another splashy new acquisition.

However, Allison doesn't particularly like paying for acquisitions in stock when Home BancShares itself is trading at such a low valuation, at least compared with the private banks he may be looking to buy. As he said on the recent conference call:

"The problem with the private bank sector ... they don't realize that their price fluctuates as our price fluctuates. You know what we can pay, there's a limit to what Home can pay. So once that becomes more realistic and they get down to 1.50 times book and we are 2.4 times, 2.5 times that we do a transaction that makes some sense. So it's really -- it's not -- as much the price of our stocks, it's the expectations of the seller. And as you know we have just -- we're not going to dilute our shareholders. We never have, we never will. So that is a factor that prohibits us from doing a transaction." 

Though Allison mostly laments what sellers are willing to sell for, obviously, if Home BancShares' stock price spikes, it would make any potential stock-based transaction more favorable.

As such, the aggressiveness of two consecutive dividend hikes could be a signal to investors to sit up, take notice, and reward Home BancShares with a higher valuation.

A buy regardless

Regardless of the motivation for the dividend hike, Home BancShares looks to be one of the most attractive banks in the sector. The company sports some of the best returns on equity and efficiency ratios you will find, and it trades at a price-to-earnings ratio of just 11.2. With management aggressively buying shares and hiking its dividend, Home BancShares remains a great bank stock to own ahead of its higher payout.

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Billy Duberstein owns shares of Home BancShares. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.