2 High-Yield Dividend Stocks To Buy In 2022 (NYSE:EBF)

Various type of financial and investment products in a cart.

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Introduction

Long-standing practitioners of portfolio construction would acknowledge the utilitarian effect of infusing a few high-yielding dividend stocks in one’s portfolio. These stocks may not necessarily provide you with the heady highs associated with your elite growth stocks, but they can be very handy from an income angle, and help blunt the impact seen from brutal drawdowns.

The S&P500 is littered with quite a few high-yielding names that have received plenty of attention from the investment community; rather than wading into this overcrowded space, I would take this opportunity to focus on a couple of lesser-known, small-cap (below $2bn in market-cap) high-yielding stocks that you may consider adding to your portfolio.

The first stock is a full-service offshore bank – The Bank of N.T. Butterfield & Son Limited (NYSE:NTB), and the second, is an industrial company involved in the manufacturing and sale of printed business products- Ennis, Inc. (NYSE:EBF).

The Bank of N.T. Butterfield & Son Limited

Company logo

Businesswire

What does NTB do?

Butterfield Bank is headquartered in Bermuda and offers a whole host of banking services encompassing retail banking, corporate banking, and wealth management (includes services such as private banking, asset management, trust, etc.). NTB’s principal geographic regions are Bermuda, Cayman Islands, the Channel Islands, and the UK. Basically, this is a banking play on some of the notable offshore markets of the world.

What is the NTB’s dividend profile?

NTB’s current forward yield of nearly 6% is very compelling; firstly, this is more than 100bps higher than its own long-term average and is currently at its highest point since late Nov-2020. Crucially, it is almost twice as much as what you’d expect from the financial sector, where the sector median works out to just a little over 3%!

Note that the company only made its NYSE debut in late 2016, so we don’t have a 10-year dividend track record, but over the last three years and over the last five years, the dividends have grown at impressive CAGRs of 32.3% and 33.18% respectively. NTB’s generosity with its dividends can also be exemplified by the fact that it has a high target payout ratio of at least 50%, regardless of the economic cycle.

What is NTB’s investment case?

NTB’s impressive dividend profile is founded on the basis of a conservative balance sheet. Typically, only 40% of its deposits are given out as loans, and its investment portfolio is heavily oriented towards AAA-rated securities (95%), the bulk of which are US government-backed mortgage-backed securities. The bank also maintains capital levels that are well above the regulatory requirements; note that its total capital ratio of 20.9% is miles ahead of what Bermuda’s financial services watchdog deems as appropriate, and it is also better than other US banks.

Capital ratio

Q1-22 Presentation

NTB’s asset quality too has picked up over time; a year ago, in Q1-21, non-accrual loans stood at $70m, this has since declined sequentially across every quarter and currently stands at $58.7m (these loans represent just 1.2% of the total loan book of NTB). Besides, the bank’s net charge-off ratio, another gauge of asset quality, continues to be at very low levels of just 0.01%.

Non-accrual loans

Q1-22 Presentation

One also needs to consider that tourism trends across some of NTB’s core markets look to be convalescing (tourist numbers, cruise ship momentum, airlifts, etc. are trending up) and this should embolden the bank to not over provide for potential adverse loans. This could also do a world of good for stimulating fresh loan growth.

Then of course NTB also stands to benefit from an environment where benchmark rates are being lifted; the effect on its own yields is likely to be a lot more pronounced than your average bank.

Interest rate sensitivity

Q1-22 Presentation

Previously, in an era of lower global market interest rates, the bank’s investments were susceptible to lower yields on account of increased prepayment speeds. This is likely to be less of an issue going forward.

In effect, a higher threshold of net interest income should do a world of good in helping NTB achieve its long-term goal of hitting 60% on the efficiency ratio front. For the uninitiated, this is a key metric used to gauge a bank’s profitability and measures OPEX as a function of total income. Incidentally, in the recently concluded quarter, NTB’s core efficiency ratio showed an improvement both on a YoY as well as a QoQ basis (Q1-22: 63.7%, Q4-21:64.7%, Q3-21: 64.8%)

Besides all these fundamental factors, also consider that the NTB stock is currently available at rather cheap valuations (both on a forward P/E as well as forward P/BV basis), relative to its long-term averages. On a forward P/E basis, the stock currently trades at 7.9x, a 27% discount to its long-term average, whilst on a forward P/BV basis it trades at a 13% discount to its long-term average.

What are the risks associated with NTB?

NTB no doubt enjoys strong clout in its home markets such as Bermuda and the Cayman Islands (for instance, it accounts for 30% of all deposits in these two markets), but at the end of the day, these are very small markets in the grand scheme of things, and there’s only so much growth you can extract when your broad universe is so small. One way to ensure growth is of course through the inorganic route, and whilst NTB is open to doing deals here, they do have a high IRR hurdle rate of 15% which may reduce the frequency with which deals are pursued. Put another way, NTB is not something that would probably appeal to your average growth investor.

Butterfield Bank is also strongly exposed to the central London residential market, and whilst this terrain has been traditionally perceived to be quite safe, recent sanctions surrounding some oligarchs there suggest that the tide may be turning. Nearly half the properties in the range of GBP10-30m have been put on sale for over a year now, and more than 20% of these properties have seen a decline in prices.

What is the technical picture of NTB?

Monthly chart

Trading View

On the larger time frame monthly chart, we can see that since the lows of the pandemic, NTB’s stock has recovered well and is currently forming something along the lines of a bullish flag pattern. We saw the first leg of the pullback being completed in September last year (one-legged pullbacks rarely ever tend to lead to breakouts in the direction of the trend), and now we are in the midst of witnessing the second pullback. I believe this is a good time to get on board, particularly as the price action on the daily chart looks oversold and could be due a comeback. After forming a fresh low, we’ve also seen the fast line of the MACD indicator recently cross above the signal line, implying that the selling momentum may have ebbed.

Daily chart

Investing

Ennis, Inc.

Company logo

Businesswire

What does EBF do?

Ennis, based in Texas, has been around for over a century now, and focuses on printed business products; I’m referring to products such as customized business forms, promotional products, envelopes, labels, tags, plastic cards, multimedia packaging, checks, etc. These products are distributed across 21 states in the US via independent distributors. EBF also operates 55 manufacturing plants across the nation.

What is EBF’s dividend profile?

The EBF stock currently offers a forward yield of 5.7% which is miles ahead of what your typical industrial stock offers (the sector median is over 400 bps lower at only 1.66%). Besides, if you get in now, you’d be getting in a rather opportunistic time as the current yield is more than 100bps higher than the stock’s 5-year average of 4.65%.

The dividend growth rates (3-year CAGR: 4%, 5-year CAGR: 7%, 10-year CAGR: 4.9%) may not be as impressive as NTB’s figures, but it’s worth noting that Ennis has a very long track record of distributing dividends; it has now paid dividends for 32 straight years (your average industrial stock can only keep this up for two years or so).

Crucially, Ennis is a lot more generous with its payout ratios; over the last five years, this has averaged around 75%, and last year it came in at a whopping 88%!

Payout ratio

YCharts

What is EBF’s investment case?

If a company has to be so generous and consistent with its payouts over such a long duration, it would first need to have the right capital structure where it is not inundated with external obligations, and secondly, it would need to generate ample free cash flow; Well, Ennis ticks both boxes. Firstly, it does not have any long-term debt on its balance sheet, and secondly, it comes across as a very competent entity in converting its operating profits into ample free cash flow.

If I look at Ennis’ dividend bill over the last five years, they typically pay out something to the tune of $22m-$26m p.a. Ennis generates more than enough cash flow to adequately cover this. Consider the very high level of conversion from operating income to operating cash flow; over the last four years, this has been consistently over 100%.

Conversion ratio

Seeking Alpha

CAPEX considerations are not prohibitive, coming in the low to mid-single-digit millions per annum, and whilst their M&A spend can often be a bit more, and can be volatile by year, there’s still enough room to meet the dividends. All in all, do also consider that the current FCF yield on the stock is close to double-digits and the highest it’s been in years.

FCF yield

YCharts

One can perhaps also point to the stock having some defensive qualities, which is also a very useful quality to have in one’s portfolio. Note that this year, when both the S&P500 and other small-cap peers have come under severe selling pressure, losing over 16%, EBF’s losses have been a lot less pronounced at only -7%.

Ennis vs the markets

YCharts

I also want to highlight a potential mean-reversion opportunity with Ennis; if you compare Ennis to its peers in the Industrials space, as represented by the Fidelity MSCI Industrials Index ETF (FIDU), we can see that this ratio looks overextended to the downside and is trading well below the mean level at around 0.47. I would imagine EBF would represent one of the better candidates for someone looking for rotational value opportunities in the industrial space.

EBF:FIDU

Stockcharts

In fact consensus estimates currently point to a February 2023 annual EPS of $1.38; this would imply a forward P/E multiple of only 12.8x which represents a 19% discount over EBF’s long-term average multiple of 15.72x.

PE Ratio

YCharts

What are the risks associated with EBF?

Principally, it’s fair to say that Ennis belongs to an industry that is going out of fashion; over the last decade or so, we’ve seen a growing proliferation of digital technologies that are dampening the demand for printed business documents. Besides, internal business processes are now increasingly being communicated via electronic medium and the internet, rather than the medium of paper. All these factors grossly undermine the value of Ennis’s customized printed products.

Ennis is also subject to supplier concentration risk as the majority of its paper is sourced from one major supplier. This becomes a particularly pressing issue in the current environment, where industry paper prices are currently close to their highest point in nearly five years.

PPP-Paper, pulp

YCharts

What is the technical picture of EBF?

Ennis’ long-term price imprints look fairly straightforward; as you can see from the image below, since 2010, the stock has continued to trade up in the shape of a faint ascending channel, respecting both the upper and lower boundaries. Currently, the stock is closer to the lower boundary, around the $16 levels, whereas your potential upside ceiling is still a long way off above the $22 levels; this implies a good risk-reward balance if you’re thinking of going long.

Monthly chart

Trading View

If I narrow the lens to the lower time frame daily chart, we can also see that after some weakness for much of April, the stock appears to have formed some sort of bottom around the $17 levels and it looks to be building a base above this price point. This should provide some confidence for those looking to buy the stock. Besides the company currently also has a $5m buyback war chest that they will use to repurchase stock, and you would think the current levels would represent a good terrain to put those funds to good use

Daily chart- Ennis

Investing

Closing Thoughts

Admittedly both NTB and EBF belong to rather staid, unremarkable industries, but ironically, this is what makes them compelling from a distribution angle; limited opportunities to grow their business open up even more room to share excess funds with their shareholders. I believe the current yields on offer are very compelling, and crucially, both businesses appear to take their distribution responsibilities very seriously. From a valuation perspective as well, things are rather supportive, and the technicals too, suggest that the risk-reward for a long play looks decent.

https://seekingalpha.com/article/4514735-two-high-yield-dividend-stocks-to-buy-2022

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