The big news around New York Community Bancorp (NYCB -3.20%) right now is its recent dividend cut. That’s the very first thing that investors need to know if they buy shares of this bank. But there’s more to the story here than the somewhat surprising dividend reduction management announced when it released fourth-quarter 2023 earnings. Here are three quick and important facts you need to know today.
1. The dividend cut
You can’t discuss New York Community Bancorp without bringing up its eyeball-grabbing dividend cut. And yet the headline on the bank’s fourth-quarter 2024 earnings release read, “NEW YORK COMMUNITY BANCORP, INC. REPORTS RECORD RESULTS FOR 2023.” The capitalization there was in the original, so by today’s internet standards, the company was screaming about how well it did in 2023. Still, the bank slashed its dividend from $0.17 per share per quarter to just $0.05, a huge 70% reduction. That seems a bit odd given a year of record results.
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To be fair, companies don’t like to highlight bad news, so a bit of cheerleading is to be expected. But if you are considering investing in New York Community Bancorp today, that dividend cut is a very clear sign that things aren’t going as well as management wants you to believe. Wall Street is obviously worried, too, given the stock fell dramatically on news of the dividend reduction.
2. Getting the house in order
The reason for the dividend cut is that it will help New York Community Bancorp enhance its capital position. Basically, the bank needs to shore up its balance sheet. That’s not a bad thing, per se, but shareholders may wonder about the clear effort management is making to speed up the process at the expense of dividend-focused investors.
The answer is twofold (see item three below for the second point), with one of the reasons likely being some big, troubled loans that just showed up on the bank’s radar screen. This was highlighted by a rather large sequential increase in the credit loss provision, which rose to $552 million in the fourth quarter of 2023 from just $62 million in Q3. That suggests that New York Community Bancorp may have had no choice but to slash the dividend as it looks to strengthen its balance sheet.
This isn’t likely to be a one- or two-quarter affair, either, so investors shouldn’t expect a quick return to the previous payout. In fact, the massive dividend cut is likely setting a new, lower base from which dividend growth will (hopefully) occur sometime in the future.
3. More regulatory scrutiny is on the way
There’s more going on here, however, than just the quality of the loan portfolio. At the end of 2022, New York Community Bancorp bought another bank. And then, in 2023, it agreed to buy portions of Signature Bank’s loan portfolio. Signature Bank, for reference, was one of the banks forced to close because of the bank runs in 2023. These deals have significantly increased New York Community Bancorp’s size in a short period of time.
Larger banks face more stringent regulatory oversight, and that means that New York Community Bancorp has little choice but to strengthen its capital structure. Summing it up, CEO Thomas Cangemi stated that “we added on-balance sheet liquidity as we prepare for the enhanced prudential standards that apply to banks with $100 billion or more in total assets.” Growing is not a bad thing, but the pace of growth here has clearly come at a material cost for dividend investors. And the troubled loans essentially created a compounding effect that forced the issue.
Probably best to wait
Given the surprise dividend cut, increasing trouble with loans, and the enhanced oversight New York Community Bancorp is facing, most investors will probably want to stay on the sidelines for now. The bank is in a transition period and it isn’t clear just yet how long that transformation will take or how bad some of its problems will get before they are fully behind the company. A key catalyst to reconsider this stock might be a return to dividend increases, but even then you’ll need to tread carefully. The story in the future could be very different from what it was in the past as this bank steps up into a more competitive peer group.
Reuben Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
