Buy Bank OZK for a "Sure Dividend"

05/11/2020 5:00 am EST

Focus: FINANCIALS

Ben Reynolds

CEO, Sure Dividend

Bank OZK (OZK), previously Bank of the Ozarks, is a regional bank in Arkansas, Florida, North Carolina, Texas, Alabama, South Carolina, New York and California; it has a market cap of about $2.8 billion, observes Ben Reynolds, editor of Sure Dividend.

On April 23rd, Bank OZK reported 2020 first-quarter financial results. For the quarter, total interest income declined 7.9% year-over-year. Diluted earnings-per-share declined 89.5% to $0.09 per share, as Bank OZK set aside $118 million as a provision for credit losses.

On a positive note, the company also increased its quarterly dividend by 3.8% and has now increased its dividend for 39 quarters in a row. On a year-over-year basis, the dividend announcement represents an impressive 17% increase.

Bank OZK not only remained profitable during the Great Recession but managed to grow its earnings as well. This performance speaks to the bank’s strong management. In fact, according to Bank OZK it has achieved record net income in 18 of the 22 years it has been a public company.

It has also achieved 40 consecutive years of positive net income, without generating a loss in any year. This is a particularly impressive accomplishment, given the Great Recession of 2007-2009 resulted in massive losses for many big U.S. banks. Therefore, we believe it will withstand this economic downturn, and potentially be an acquirer of weaker firms.

Estimates for 2020 have come down substantially given the unique and unfortunate economic situation unfolding due to COVID-19. Still, the stock appears to be significantly undervalued. Based on expected EPS of $3.40 for 2020, shares are valued at just 6.8 times earnings.

Should the stock revert to the fair value multiple of 10 over the next five years, shareholders would see an 8.0% positive impact on annual returns. Combining this with our estimate of 5% annual earnings growth and the 4.7% dividend yield, we see total returns of 17.7% annually over the next five years.

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