KRNY - Kearny Financial Management Remains Undeterred By Current Market Environment

2023-09-10 04:36:59 ET

Summary

• I have been a customer of Kearny Financial since 1999 and have been writing about investing in the company for three years.
• Seeking Alpha rates the stock as a sell, but I disagree and rate it as a weak buy.
• Wall Street ratings for the stock have been varied, ranging from strong sell to hold and long.

Introduction

I've been a customer of Kearny Financial ( KRNY ) (or its predecessors) since 1999, and have been writing about investing in Kearny Financial ((KRNY)) for nearly three years on Seeking Alpha. Wall Street entities rating the stock, (at least according to my Schwab brokerage account), have rated the shares all over the place, from a Strong Sell and Underperform, through Hold and Long. Rather than trying to keep anyone in suspense, I have decided to rate the shares a weak "Buy".

To be clear, as with almost all of the articles I have written for Seeking Alpha, we are currently long the stock, although in this instance it is a relatively small position - less than 1% of our equity holdings. While we currently have no immediate plans to make additional open market purchases, we do intend to continue reinvesting 100% of the dividends.

The Dividend

I prefer dividend paying stocks, and over the years have typically reinvested those dividends. The reason for doing so is easily summed up in this recent publication by Hartford Funds :

Dividend-paying stocks are like the Volvos of the investing world. They’re not fancy at first glance, but they have a lot going for them when you look deeper under the hood. In this insight, we’ll take a historical look at dividends and examine the future for dividend investors.

The Long-Term View

Dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1960, 69% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding,...

Kearny's current dividend is not spectacular, and it has a spotty history due to the banking collapse that triggered the Great Recession. Kearny stopped paying quarterly dividends in 2012, and when the dividend was restored in 2015, it was just over half the rate of its prior payments - $0.02 vs. $0.036221. Since then, the increases have been erratic.

The restored quarterly dividend had initially been kept quite low, six payments of $0.02 followed by 5 payments at $0.03, but there were also "special" or extra dividends of $0.1186 in 2016 and $0.16 in 2018. There have been no special dividends since 2016, but the quarterly dividend has been increased several times to its current rate of $0.11. With the recent share price of $7.23, the forward yield of the $0.44 annual dividend has risen to more than 6%.

Share Buybacks Continue

We often see boosts to share prices when companies make announcements about buybacks. Unfortunately, those boosts often fade after an initial bump. Years ago, Credit Suisse did a study with the ominous title "Stock Buybacks - Adding Value or Destroying Value?" Factoring in the cost of capital, the study concluded, "As a result, it looks like most of the buybacks by the S&P 500 over the past eight years have not yet added much value for remaining shareholders."

As much as I dislike share buybacks, it's clear that Kearny has managed their buybacks much better than many companies. Kearny has used cash and stock to make acquisitions in its NJ and greater New York City footprint over the past decade. Its most recent acquisition was Millington Bank in July 2020. The Millington acquisition would result in the issuance of new shares that would help drive the outstanding share count from 82,587,000 at year-end 2018 to 91,054,000 by the end of 2019.

Source: Company 2023 10-K (Reformatted by author)

Even more important, the above table clearly shows that the shares outstanding have rapidly - and significantly - been brought back down from the 91.1 million at the end of FY 2019 (following the acquisition of Millington). Furthermore, the cover page of the bank's most recently filed 10-K shows that as of August 18, 2023 there were just 65,214,903 shares outstanding, far below the number of shares outstanding immediately prior to the acquisition - and a slight increase from the 64.8 million shares outstanding at fiscal year-end 2023. Although not particularly important, we can reasonably assume that the difference of 0.4 million shares was due to compensation plans involving equity grants or vesting and conversion of options.

Dividend Coverage

Kearny has been able to grow revenues on certain variable rate residential mortgages, increases to rates on existing Home Equity Lines Of Credit (or HELOCs), new bridge loans, new fixed rate debt, etc. but also has to increase the amounts it pays out on bank CDs or time deposits. As the share count continues to rapidly drop, dividend coverage should also improve, but it appears as though there is a significant lag as dividend payout ratio has moved sharply higher - to 70.2% in the recently completed fiscal year - from an average of less than 50% for the prior three years.

The sharply higher payout ratio occurred despite money-saving moves that included a branch closure, bank layoffs and cutbacks in staffing.

Rating

As noted at the top of this article, we are long the stock and are rating it a Buy. While the real estate market in Kearny's footprint has slowed noticeably, as measured by lines waiting to check out Open Houses, and the bidding wars may be gone, there does not appear to be a significant pullback in home prices.

in addition, there is little evidence of layoffs that would cause homeowners to default. That would seem to indicate that revenues for the bank will be sufficient to cover the dividend and support its current share price.

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