Like always, Bank OZK (OZK - Free Report) has announced an increase in its regular quarterly cash dividend. The company announced a dividend of 22 cents per share, representing 4.8% rise from the prior payout. The dividend will be paid on Jan 22 to shareholders on record as of Jan 15.
This marks 34 consecutive quarters of dividend hike by the company. Based on this increased dividend, Bank OZK’s dividend yield stands at 3.8% considering last day’s closing price of $23.20. Not only the yield is attractive for income investors, it also represents a steady stream of income.
While the stock looks attractive based on regular rise in dividend income, one must take a look at Bank OZK’s fundamentals and financial performance before taking any investment decision.
Bank OZK has grown substantially through de novo branching strategy and inorganically. Over the last six years (2012–2017), the company’s revenues witnessed a CAGR of 31.7%. Given its strong balance sheet position, the bank is expected to continue expanding through acquisitions. It also plans to open additional branches in new and existing markets.
Further, over the last three-five years, the company witnessed earnings per share growth of 24.8%. Also, it is expected to deliver strong earnings performance as indicated by its projected earnings growth of 7.4% and 6.1% for 2018 and 2019, respectively.
Bank OZK displays strong financial leverage. Its debt/equity ratio of 0.09 compares favorably with the industry average of 0.40, indicating a lower debt burden relative to the industry.
Further, Bank OZK looks undervalued based on price-to-earnings (P/E) and price-to-book (P/B) ratios. The company currently has a P/E ratio of 7.18 and P/B ratio of 0.80, which are below the industry average of 11.48 and 1.19, respectively. Also, the stock has a Value Score of A. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best upside potential.
Also, Bank OZK’s trailing 12-month return on equity (ROE) reflects its superiority in terms of utilizing shareholders’ fund. The company’s ROE of 11.17% compares favorably with 9.97% for the industry.
Based on the above-mentioned factors, the stock seems worth investing in, but one must look in to the following downsides before taking the final decision.
Bank OZK’s net interest margin continues to remain under pressure despite rise in interest rates. Reduction of the high yielding purchased loans portfolio is one of the main reasons for margin pressure. Further, it is making adjustments in investment securities portfolios leading to lower yields. Thus, the trend will likely persist in the near term.
Also, mounting non-interest expenses pose a concern for the company. Over the last six years (2012–2017), expenses witnessed a CAGR of 23.8%. As the company continues to expand inorganically and open branches in newer areas, overall expenses are expected to remain elevated.
Moreover, Bank OZK’s price performance is quite disappointing. Its shares plunged 52.9% in 2018 compared with the decline of 20.4% for the industry it belongs to.
Just because Bank OZK has announced a dividend hike, it will not be wise to bet on the stock right away. Pressure on margins and rising expenses make us apprehensive about its prospects.
Also, its Zacks Consensus Estimate for 2018 earnings has remained unchanged in the past 30 days. Thus, the stock currently carries a Zacks Rank #3 (Hold).
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