Less than a year ago, I wrote my first article on Kearny Financial (NASDAQ:KRNY), the holding company of Kearny Bank, quoting a famous quote from Peter Lynch, the legendary manager of Fidelity’s Magellan Fund, “Invest in what you know.” During a 13-year tenure (from 1977 to 1990) at the helm of Magellan, the fund recorded an average annual growth of 29.2% per year, almost double the return of the S&P 500. And the assets under his management grew from around $20 million to nearly $14 billion.
Well, I knew a bit about Kearny Bank since I had a home equity line of credit (or HELOC) with the bank (and its predecessor, Pulaski Savings Bank) for over two decades. In fact, the only reason I knew about Pulaski was because I had seen an ad in a local newspaper promoting their HELOC at Prime minus 0.625%, which is 0.125% better than my current lender. That may not seem like a lot, but I’m still a strong believer in a quote sometimes attributed to Ben Franklin, “A penny saved is a penny earned.”
But I digress. Even before considering Kearny as an investment, I knew a little about the bank as a client. And most of what I knew about this community bank was positive. Convenient lobby hours, free ATMs, car rides (similar to the one listed above), helpful and friendly cashiers… But what I really liked was this rate HELOC and unlimited free checks to be drawn on the account, and their willingness to extend the maturity for another 15 years. Although the checks initially required a minimum drawdown of $500, this requirement was removed a few years later, making the account even more attractive.
It also had all the trappings of a small town community bank. In the lobby, there was always a small table set up where some local professionals had left pens, candy, or calendars promoting their area of expertise. Then, of course, there was his support for all sorts of local community activities, and especially charities. There are rarely times when I walk into the branch without them collecting for charity or holding some sort of contest, raffle or giveaway. One of my favorites is to encourage – and reward – young children to start saving.
Kearny Bank pays for the A’s
Good grades pay off in life and at Kearny Bank. K-12 students with an existing or new Kid’s Club account can earn $1 for every A on their current report card.
I still remember my first savings account from the early 1950s, when I saw that extra $0.04 appear on my passbook. I had no idea what that was, or what “INT” even meant. And, when I was told it was because they were paying me to keep my money with them, I was hooked. It would be many years before I learned Ben Franklin’s quote, “Look at the pennies and the dollars will take care of themselves.” Old Ben was right, and for several reasons, he earned his place on the $100 bill.
While these are probably not the best reasons to invest in Kearny Financial, if they help the bank acquire and retain loyal customers, it doesn’t hurt. And all things being relatively equal, I will remain a loyal customer. So why am I writing about Kearny? Last year, Seeking Alpha created an “Underhedged Stocks” category, encouraging contributors to write about often overlooked opportunities. I was surprised to see Kearny on the list, I didn’t think of it as a public company and never thought of it as an investment.
As for being undercover, well, there hadn’t been an article about it in five years, and more importantly, I was looking for a dividend idea where I could use some of my excess cash.
My only regret is that I didn’t invest much more in Kearny in November when I wrote:
…Like many investors my age, I am very interested in dividend income, dividend yield and the company’s ability to sustain and grow the dividend. Along with Kearny, the recent surge in the stock price pushed the closing price to $9.285 on Monday, November 9. This puts the forward yield just below 3.5%, and many investors will find this rate too low to be attractive. Other investors may find the dividend history too short or the payouts too inconsistent and erratic. …
… I took a small position in Kearny Bank. This is partly because I liked the local branch, partly because I like the current dividend yield and partly because I like the prospect of seeing the dividend increase significantly over the next few years. .
At the time I was writing the article, the price was $9.285, while the price at publication was $9.54. Since then, the price has reached a high of $13.67 and closed last week at $11.97. And the quarterly dividend, the reason I was drawn to the stock, has been increased twice since this article was published. First, from $0.08 to $0.09 in the first calendar quarter, then to $0.10 in the second quarter. The forward yield based on the closing price of $11.97 is still a bit low at 3.3%.
To be clear, the dividend has had an erratic history. When it started being paid in 2005, it was a fairly constant quarterly dividend of $0.05 until 2012 when it was reduced to zero. It would not be restored until the third quarter of 2015 when it was resumed at $0.02. It remained at this level until the end of 2016. It then increased to $0.03 for five quarters, with an additional special dividend payment of $0.12 in October 2017. In the second quarter of 2018, it was raised to $0.04 for two quarters, followed by another special dividend in the third quarter – this time for $0.16 – before ending the year with a quarterly dividend payment of $0.05.
Although there have been no more special dividends in recent years, the regular quarterly dividend was increased to $0.06 for the first three quarters of 2019, before another increase to $0.07. Last year there were four payments of $0.08 followed by the previously mentioned two payments of $0.09 and $0.10. Based on the erratic dividend increases, it is difficult to predict when or by how much the dividend will be increased again.
What I do know is that the bank will probably generate enough cash to keep increasing the dividend. Not only has Kearny generated $0.20 in earnings in each of the past two quarters, but it has also made acquisitions and repurchased stock. Following a cash and stock transaction last year to acquire another New Jersey bank, outstanding shares were quickly reduced to pre-acquisition levels via share buybacks. And, following the completion of this buyback, which involved 5% of the outstanding shares, Kearny simultaneously announced a new buyback program to buy an additional 5% of the outstanding shares.
Although share buybacks are not directly tied to dividend payments, having fewer shares outstanding should allow the dividend to increase without increasing the share of earnings used to pay those increased dividends. More importantly, management would be unlikely to jeopardize dividend payouts if using cash to continue buying stocks negatively impacts dividend coverage.
Looking forward to
Given Kearny’s performance during the COVID-19 pandemic, I expect to see them continue to thrive as the economy improves. This means higher dividends, more share buybacks and an increase in share price. For these reasons, despite the price increase since my previous article, I am raising my rating to Very Bullish and increasing my position.
A final note. Two days after the publication of this previous article, it was announced that Kearny Bank’s parent company, Kearny Financial Corp., has been named to a prestigious annual list of 100 fastest growing companiesas determined by Fortune magazine. One of only two New Jersey-based companies on the list, Kearny Financial Corp. ranked 84andagainst 98and to Fortunefrom the 2019 list.
The companies on the list were ranked based on a formula of three-year annual revenue and earnings growth rates and a three-year annualized total return. Kearny Financial Corp. delivered 24% revenue growth and 37% earnings per share growth.
Not bad for a bank I would never have thought of if it weren’t for that 0.125% savings on my HELOC and the inclusion of Seeking Alpha in its list of underhedged stocks.