3 Unduly Punished High-Yield Bank Stocks to Buy

The banking sector has recently been thrown into disarray due to the failure of several large banks, including Silicon Valley Bank (SIVB) and Signature Bank (SI) . Many investors fear that the contagion could spread to other banks, leading to widespread failures or at least severe impairments of intrinsic value across the sector.

This has caused the stock price of virtually every U.S. bank to plummet over the past month. While there is certainly some merit to the market’s concern as tighter regulations and potentially higher FDIC insurance premiums could hurt banks’ profitability moving forward, the selloffs appear to be overblown in several cases.

Below, we will cover three banks that offer well-covered and very attractive dividends that could provide attractive long-term income for investors who buy now while the prices are opportunistic.

#1. U.S. Bancorp

U.S. Bancorp (USB) started in 1863 as the First National Bank of Cincinnati and has grown into a national powerhouse in the banking industry. It has 69,000 employees, a $54 billion market capitalization, and approximately $30 billion in annual revenue. The bank has expanded from being a regional player to becoming the fifth-largest bank in the U.S. in terms of assets. While it primarily competes in traditional banking activities, it also provides wealth management, payment, and investment services.

U.S. Bancorp has had strong earnings-per-share growth since the financial crisis, but the Covid-19 pandemic caused a drop in earnings in 2020. Our expectation for 2023 is EPS growth of 5% due to the acquisition of MUFG Union Bank and a low base in 2022, but there are headwinds of low net interest margin, a lack of loan growth, and lower share repurchases. However, lending rates rising could lead to better growth starting in 2023 if there is no severe recession.

U.S. Bancorp’s payout ratio is in line with peers. As a result, the dividend is expected to continue growing in the coming years along with continued share repurchases.

USB reported mixed fourth quarter and full-year earnings on January 25. Adjusted EPS were ahead of estimates, while revenue fell short. The earnings for the full year were driven by strong net interest income and operating leverage.

U.S. Bancorp’s payout ratio is expected to remain below 50% of earnings in the coming years, in line with historical norms. Its dividend is considered safe, with little risk of a cut, and mid-single-digit dividend increases are expected to continue. U.S. Bancorp’s strength lies in its strong operating history and world-class management team as a regional bank on a massive scale, making it more resilient through recessions than its larger peers.

With a safe payout ratio and a 5.5% dividend yield, U.S. Bancorp is an attractive dividend growth stock that could deliver exceptional total returns moving forward as the stock price potentially recovers from its 38% decline over the past year.

#2. Fifth Third Bancorp (FITB)

Fifth Third Bancorp (FITB) is a bank holding company that operates banks in 12 midwestern and southern U.S. states, including Georgia, Florida, Michigan, and Ohio. It has nearly 1,100 offices and a market capitalization of $17 billion. The company generates annual revenues of close to $9.3 billion.

Fifth Third Bancorp had a 9.5% CAGR in EPS from 2012-2021, but the Covid-19 pandemic greatly impacted the banking sector and Fifth Third Bancorp in 2020. From 2010-2019, the company boasted an EPS CAGR of almost 16%, but this growth rate is deceiving as the bank was recovering from a low base from the 2007-2009 recession. As a result, moving forward we anticipate a 3% annualized EPS growth rate is appropriate.

Fourth-quarter and full-year 2022 results showed robust revenue growth of 14.3% to $2.32 billion in Q4. That said, this figure was $20 million less than analysts expected, while EPS of $1.01 compared favorably to the prior year and was $0.01 above estimates.

For 2022, revenue grew 4.8% to $8.32 billion, while EPS of $3.41 compared to $3.77 in the previous year. The bank’s average portfolio loans and leases improved 10.9% year over year to $121.4 billion, while provisions for credit losses were $180 million in Q3.

With a safe payout ratio and a 5.2% dividend yield, Fifth Third Bancorp is an attractive dividend growth stock that could deliver exceptional total returns moving forward as the stock price potentially recovers from its 45% decline over the past year.

#3. Ally Financial

Ally Financial (ALLY) is a financial services company that offers services to consumers, businesses, automotive dealers, and corporate clients. Its services include term loans, lines of credit, fleet financing, vehicle financing, and commercial insurance products. Ally Financial has several segments, including Automotive Finance Operations, Insurance Operations, Mortgage Finance Operations, and Corporate Finance Operations.

The company was founded in 1919 and is based in Detroit, MI. It also holds a consumer mortgage finance loan portfolio that includes mortgages originated by third parties.

We think the company’s long-term growth outlook is decent, as its offerings attract new customers, especially among millennials. Although profits declined in 2020, they soared in 2021 and 2022 due to below-average credit costs. In 2023, Ally Financial is expected to have higher charge-offs and provisions for credit losses, but still has a good chance of delivering solid earnings-per-share growth, primarily via share repurchases.

Ally Financial reported flat revenues of $2.2 billion in Q4 2022, compared to the same period a year ago, but managed to originate $9 billion in new consumer auto loans and grow deposits by $3.8 billion quarter over quarter. However, profits declined on a year-over-year and sequential basis due to provisions for credit losses increasing to a more normal level from low levels during the pandemic.

Ally Financial still managed to generate higher-than-expected EPS of $1.08 during the quarter and $5.99 for all of 2022, down from 2021, but guidance for 2023 sees earnings-per-share of $4.00, still ahead of pre-pandemic levels.

With a safe payout ratio and a 5.0% dividend yield, Ally Financial is an attractive dividend growth stock that could deliver exceptional total returns moving forward as the stock price potentially recovers from its 46% decline over the past year.

Bottom Line

While the banking sector remains a relatively risky place to invest at the moment given the ongoing uncertainty, there is also substantial opportunity to be found there.

In U.S Bancorp, Fifth Third Bancorp, and Ally Financial, investors can lock in sustainable dividend yields of 5%+ alongside massive share price upside potential if/when the current banking sector panic dissipates.