Melpomenem
Introduction
I have often noted that I’m generally not in favor of a company buying back its own shares. Management often lumps the money spent on buybacks and the money paid out in dividends as “cash returned to shareholders”. It’s somewhat misleading, and given a choice between a dividend hike and a share repurchase program that may increase my percentage ownership of the entity, I would much rather receive an increase in the regular quarterly dividend. Or, if management is reluctant to increase the regular dividend because it implies a higher ongoing commitment, then pay out a special dividend.
Buyback announcements often occur when sales and earnings are strong and companies are awash with cash. And, if earnings are strong, one would expect that the buybacks will be occurring when the share prices are high. More importantly, while buybacks might be good for management and the board (and their compensation plans), how good is it for the rest of the shareholders? A decade ago I came across a buyback study by Credit Suisse ominously titled “Stock Buybacks – Adding Value or Destroying Value?” The report noted the following:
From 2004 through 2011 the S&P 500 companies spent $2.7 trillion buying their stock. Did they invest wisely? Using our Stock Buyback Scorecard we find only 180 companies that were able to generate a return above a 7% cost of equity and just 98 companies that beat simple dollar cost averaging. 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.
However, it’s not just about the performance measured in the Credit Suisse study. Sometimes buybacks are never completed, or the shares outstanding don’t decline. Instead, new shares are issued as part of executive or board compensation plans. Or, new shares are used as currency to make acquisitions. Why bring all this up? Kearny Financial (NASDAQ:KRNY), the subject of this article, recently announced a new share buyback program.
Kearny’s Share Buybacks
The Kearny buyback announced last month stated that it would purchase:
up to 4,000,000 shares of the Company’s outstanding common stock. In conjunction with this announcement, the Company also announced the completion of its previously disclosed stock repurchase plan which authorized the repurchase of 7,602,021 shares. Such shares were repurchased at a cost of $96.8 million, or $12.73 per share.
One key takeaway is the fact that the bank did complete the previous authorization (as well as several earlier authorizations). Unfortunately, the average price paid for the shares in the most recent buyback was significantly higher than the stock’s recent closing prices – prices that were regularly below $11.50 over the past six months, and touched a low of 0f $10.59 this past week. On the other hand, the share buyback, like Kearny’s previous share buyback authorizations, was fully completed. Kearny’s previous buybacks have had another unusual characteristic. Each of the prior buybacks was announced not only as a percentage of the shares outstanding, but also for a very precise number of shares (such as the 7,602,021 shares in the recently completed buyback).
It’s important to note that over the past half dozen years the shares outstanding haven’t declined as much as one might have expected. That’s due to several acquisitions that have taken place – most recently the acquisition of Millington Bank completed just over two years ago. That cash and stock transaction resulted in the issuance of 5,853,811 new shares of Kearny stock.
The Dividend
While Kearny has a long history, tracing its roots to 1884 when it was established as a New Jersey mutual building and loan association, its current form is quite different. Also, its quarterly dividend does not have a particularly long history. It was initiated in 2005 at less than $0.15 but was cancelled in Q1 of 2012. It would be reinstated at an annual rate of $0.08 in Q3 of 2015, and has been increased multiple times at erratic intervals. The $0.02 quarterly rate was paid out for six quarters and increased to $0.03 for another 5 quarters, with a special dividend of $0.12 in late 2017. After two payments of $0.04 it made another special payment of $0.16 and increases were to become more frequent, but still at erratic intervals (although there have been no additional special dividends).
There was one payment at $0.05, three payments at $0.06 one payment at $0.07, four payments at $0.08, one at $0.09, two at $0.10 and the most recent four payments at $0.11. I had been expecting another increase as the share count continued to come down, and am somewhat disappointed that it hasn’t yet occurred.
The latest relevant SEC filing by the bank indicated that there were 68,226,775 shares outstanding on August 19, 2022. That was down 25% from a recent high of 91.054 million shares outstanding in 2019, and should allow for further increases in the quarterly dividend.
Share Buybacks or Dividend Hike?
As noted above, share buybacks often deliver less than stellar results. There was an investor presentation over the summer that used results through the end of the bank’s fiscal year (June 30th). Included was a bar chart that showed cumulative dividend payments and share repurchases for the past five fiscal years, noting:
- The bank had returned $903 million to shareholders, comprised of $152 million in dividends and $751 million in share repurchases.
- The bank had repurchased 10.2 million shares during Fiscal 2022 at an average price of $12.67 per share.
Considering the recent price of less than $11, one has to wonder whether the cash would have been better spent paying shareholders a special dividend. A final thought for those that believe increasing their percentage ownership is more important – use any increased payment or special dividend to buy more shares.
Earnings Trends
The earnings have risen sharply, if irregularly, over the past five years, obviously helped by the buybacks and (and perhaps the Millington acquisition). With the Fed’s ongoing rate hikes, Kearny will eventually have to pay more in order to hold onto deposits. On the other hand, its adjustable rate mortgages should also escalate, increasing revenue for the bank. It would also increase the risk of borrowers defaulting, although that would appear to be less of an issue in the bank’s market.
Conclusion and Rating
We have a few small positions in Kearny and are unclear whether or not we will add to our holdings at this time. As interest rates have risen, the bank is likely to reap far more in interest rate hikes on its adjustable rate mortgages and Home Equity Lines Of Credit (or HELOCs) than it has to pay out on time deposits, savings or checking accounts.
That leaves the risk of defaults on its loans as the wild card. Most of its business would seem to be in the more affluent sections of New Jersey and New York, and the risk should be tolerable for most investors. I remain long and may decide to add at the recent price below $11. That alone would rule out a rating of sell, and even makes a hold questionable. I have decided to go with a buy rating, since I am currently reinvesting the dividends and a dividend yielding 4% wouldn’t be the worst place to park some cash.
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