Kearny Financial Stock (KRNY): Share Buybacks Improve Dividend Coverage

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I last wrote about Kearny Financial Corporation (KRNY) (the holding company of Kearny Bank) in a mid-December article titled Check out Kearny Financial with its rising dividends and aggressive stock buyback. This title succinctly sums up my opinion. The regular quarterly dividend had just been increased by 10% at an annual rate of $0.44, and aggressive stock buybacks over the past five years had reduced the average number of shares outstanding by 25% from at their top. This reduction in share occurred despite two equity-financed acquisitions in the same period. In addition, the annual dividend payout ratio had also started to decline sharply from its peak:

For years ending June 30

(In thousands, except percentages and per share amounts)

Years ending June 30

2021

2020

2019

2018

2017

Net income/share (basic and diluted)

$0.77

$0.55

$0.46

$0.24

$0.22

Weighted average number of common shares outstanding (in thousands)

Basic

82,387

82,409

91,054

82,587

84,590

Diluted

82,391

82,430

91 100

82,643

84,661

Cash dividends per share*

$0.35

$0.29

$0.37

$0.25

$0.10

Payout rate (1)

45.1%

52.8%

80.8%

102.9%

45.0%

(1) Represents cash dividends declared divided by net income

*Note: The table above includes special dividends of $0.12 in October 2017 and $0.16 in October 2018.

Source: Enterprise 2021 10-K (Reformatted by author)

Perhaps more importantly, the 10-K filed by the bank for the year ended June 30, 2021 had shown that

As of August 20, 2021, there were 77,004,871 Common Shares of the Holder outstanding.

Continued buybacks further reduce shares outstanding

The number of shares outstanding continued to decline. Its second fiscal quarter 10-Q for the period ending December 31, 2021 showed that as of February 2, 2022, the number of shares had fallen to 72,753,040, an additional decline of 5.5%. Assuming everything else remains constant, the stock cut should continue to have several benefits for investors:

  1. It improves the coverage of dividends,
  2. It increases earnings per share,
  3. It reduces the amount of cash required to pay dividends, and
  4. It allows the bank to increase the dividend again.

Why I invested in Kearny

There were several reasons why I started investing in this bank. One of them was a similar quote from two legendary and very successful investors – Peter Lynch and Warren Buffett. For Peter Lynch, head of Fidelity’s Magellan fund, it was “Buy what you know”. With Warren Buffett, it was “Invest in what you know”. Both would also acknowledge that this was just a starting point. Anyway, I had been a “customer” of a predecessor of Kearny Bank – the Pulaski Savings Bank – and I was familiar with the way they treated customers.

For over four decades, I’ve had home equity lines of credit (or HELOCs) at banks big and small. I liked the flexibility of being able to borrow money quickly at low rates just by writing a check, and I’ve used them to buy cars or finance investments at lower rates than a car loan or home loan. a typical margin loan. I would also hop from bank to bank looking for lower loan rates. To be completely honest, I was very happy with my neighborhood bank whose interest rate was tied to prime minus 0.5%. We still have a safe at this bank, as well as our main checking accounts, but when Pulaski Savings Bank (head office in a nearby town) announced their HELOC at 0.625% below prime, we moved the HELOC there. .

And it wasn’t just the additional 0.125% savings, although that would have been enough. There was also a “totally free” account feature. This checking account initially had a $500 minimum on checks, but checks were free of any other fees or printing costs. Pulaski eventually eliminated the $500 minimum, making it even more attractive. Pulaski was eventually merged with Kearny Federal Savings Bank, and more recently the charter and names were changed. The neighborhood aspects of the bank remained unchanged, although the bank added more online banking features.

Am I biased? Sure. I like the bank and the tellers and the freebies in the lobby. I love the hours of operation, the drive-thru tellers, and the fact that they encourage kids to save by opening a savings account and giving them $1 for every A on their report card. None of this in itself would have encouraged me to invest in the bank, but it was incentive enough to make an investment out of it. This research led to our first stock purchase and my first article on the bank in November 2020 where I gave it a buy rating.

The price at the time was $9.54. It exceeded my expectations and hit $13.36 at the May 15 close, posting a 40% gain since then. I wrote a follow up post in July 2021 when the price had risen to $11.92 and was a bit carried away which gave it a strong buy. So far, the stock has failed to live up to my Strong Buy expectations, which call for at least an 18%-20% gain. The gain to date has been 12%, and stocks can still hit that target by July and earn that strong buy. My two most recent articles rated Kearny as a buy, as did this one.

Should we invest in Kearny?

The attraction for me was how they managed to expand their footprint, reduce the number of shares, increase the dividend and increase the dividend coverage. On the one hand, we have the current dividend yield at 3.26%, not so attractive given the latest inflation figures. On the other hand, this dividend is well covered and has plenty of room to continue growing. I will continue to enrich our positions.

Seeking Alpha’s Quant Rating System has the stock rated Strong Buy with a rating of 4.71. It also ranks the dividend lower than I think, with safety being a C and growth, yield and consistency each getting a C+. Each of these dividend ratings is higher than three months ago, except for the yield which is down from a B-.

The reader will need to decide whether the dividend, dividend yield, potential dividend increases, and potential share price appreciation are enough to be attractive as additions to their portfolio.

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