Small Regional Bank With Oversized Dividend Growth

Regional banks play an important role in every dividend portfolio.

They tend to have higher yields than many other industries.

Plus, well-run banks are safe places to invest because of their predictable cash flow.

The one downside to regional banks is their lackluster dividend growth.

Many regional banks keep their payments flat year after year.

And the ones choosing to raise their dividends usually only raise them a few percentage points each year.

But I found one regional bank bucking the trend of low dividend growth.

City Holding Company (ticker: CHCO) is the holding company for City National Bank, a regional bank operating in West Virginia and the surrounding states.

What’s a holding company?

City National is the only subsidiary of City Holding Company.

The structure gives the bank more flexibility with regulators and is very common for small regional banks like City National.

Let’s get into the details.

Below is a map showing City National’s branch locations.

The bank has grown considerably over the past decade, with earnings and free cash flow averaging double-digit growth.

As a state, West Virginia is really struggling economically.

Over the past decade, only Michigan and Louisiana have had slower-growing economies than West Virginia.

So, how is City National able to grow in such a struggling region of the US?

City National strategically locates its operations near major economic centers like Charleston, WV; Huntington, WV; and Lexington, KY.

Outside of those areas, City National largely serves communities along major highways, which have better economic prospects than rural West Virginia.

City National has passed along its impressive growth to its investors through dividends.

The regional bank has paid a dividend every quarter since 2004.

And outside of a few years following the financial crash in 2008, City National has raised its dividend every year.

City National just raised its dividend again.

The regional bank will now pay $1.00 per share in dividends each quarter, which is 15% higher than its last payment.

But you need to act quickly.

You must own shares in City National by October 14 (Wednesday) to get the higher payment.

City National’s dividend growth has really accelerated in the past few years.

It took over 10 years for City National to double its 2004 dividend payment.

However, in less than 9 years, City National doubled its dividend to $1.00, with the vast majority of the growth happening in the last 5 years.

Can City National continue its aggressive dividend growth?

City National’s dividend payout ratio, using free cash flow, has hovered around 35% over the past few years.

The 35% payout ratio is right around the ratio of other regional banks, so City National isn’t paying too much to its investors.

There’s plenty of room to keep growing its dividend.

But, remember, City National has been growing its free cash flow on average by more than 10% each year over the past decade.

As long as City National can continue its growth, the company can still grow its dividend without raising its payout ratio.

The only negative about its dividend is its modest 2.5% dividend yield.

Most regional banks have yields over 3%.

However, the low dividend yield is a good problem to have since the main culprit is City National’s excellent stock price performance.

Over the past 5 years, City National has blown away other regional banks.

On top of the fast dividend growth, City National has excellent financials.

The regional bank is incredibly profitable.

Its profit margin of 41% is almost double the margin of other regional banks and is near an all-time high for the company.

The stock is a little expensive, with a price-to-earnings (P/E) ratio of 15x (most banks are under 12x).

But I’m willing to pay more for a stock with such excellent dividend growth and profitability.

What regional banks do you own in your portfolio?

Michael Jennings

Dividend Stocks Research