This bank is expected to grow at an annual rate of 12% over the next five years. The shares have a current dividend yield of 3.83%, paid quarterly.
Bank OZK (OZK)
From Sure Dividend
Bank OZK (OZK) is a $3.3 billion market cap regional bank founded in 1903 whose service territory mainly includes Florida, N. Carolina, Georgia, Arkansas and Texas. It also has locations in five other states.
Bank OZK posted strong second-quarter earnings on July 18th. The bank posted total interest income of $297 million, an 8.5% increase year-over-year. Net interest income, however, was flat against last year’s Q2 as deposit costs rose. Bank OZK’s efficiency ratio suffered in Q2 as well, rising from 35.2% in last year’s Q2 to 39.3% this year. That’s an outstanding efficiency ratio despite the increase year-over-year, and it helps Bank OZK maintain high levels of profitability. Total loans were up 4.3% year-over-year to $17.5 billion, which helped offset rising deposit costs.
Deposits were $18.2 billion in Q2, implying an extremely high loan-to-deposit ratio of 96%. On October 1st, Bank OZK raised its quarterly dividend by 4.2% from the previous quarter. Bank OZK has now increased its dividend for 37 quarters in a row.
Bank OZK is performing well in its key markets due to new branches and acquired growth. It is also expanding into areas of higher growth, such as Texas, Florida, and California. We see Bank OZK’s mix of core market strength and access to growth markets as a competitive advantage. Bank OZK not only remained profitable during the Great Recession but managed to grow its earnings as well. This performance speaks to how well-managed Bank OZK is. We believe it will withstand the next economic downturn quite well, and potentially be an acquirer of weaker firms.
Bank OZK has a very strong history of growth, compounding earnings at a 22% annual rate from 2009 to 2018. The bank has been able to grow profits at impressive rates over time through a combination of organic and acquired growth, and we see this continuing. We see a forward growth rate of 6% annually in the years to come, which is low by Bank OZK’s own standards, but still acceptable.
We expect the bank to earn $3.50 per share in 2019. Based on this, it is valued at just 7.4 times earnings. That compares very favorably to our fair value estimate, which is 11 – below the bank’s 10-year average valuation multiple of 14.1. Should the stock revert to the fair value multiple, shareholders would see an 8.3% tailwind to annual returns. Combining this with our estimate of 6% annual earnings growth and the current yield, we see total returns of about 18.2% annually over the next five years, making Bank OZK a highly attractive dividend growth stock from the financial sector.
Ben Reynolds, Nick McCullum, Bob Ciura, Josh Arnold & Samuel Smith, Sure Dividend Newsletter, www.suredividend.com, ben@suredividend.com, October 2019