This Regional Bank Stock Just Doubled Its Dividend

Regional bank PacWest Bancorp recently doubled its dividend. But is it sustainable? I’m not convinced. 
PacWest Bancorp (Nasdaq: PACW), ever heard of it? Unless you run a small business in California then I’m guessing you haven’t. But this unheard of regional bank stock just doubled its dividend.

Income investors know that stable dividends are the lifeblood of a good investment opportunity. But even better than a reliable and juicy dividend is a dividend that keeps on growing. PacWest pays a dividend that gives it a 4.2% yield and recently increased that dividend by 100% from $0.25 per share to $0.50 per share.
Should you buy PacWest stock? I’d say “no,” and I’ll explain why below. But first, here’s some background.
Like many other regional banks, this Los Angeles-based bank isn’t involved in the kind of risky loans and financial instruments that nearly sank the major financial institutions during the financial crisis.
Instead, PacWest provides commercial banking services for small-to-medium-sized businesses. Considering that these small- and medium-sized businesses are driving the economic recovery, the bank should do well as the economy recovers.
Has it?
The short answer is yes. PacWest’s loan portfolio is growing at an annualized rate of 14% and you can see the noticeable change in revenue in the chart at the bottom of this article. Revenue remained stable for a while following the financial crisis and has been climbing since the middle of last year as the U.S. economy – and particularly California – has grown stronger.
The company also recently completed a merger with CapitalSource Business Financing Group. At the time of the merger, CapitalSource had $8.9 billion in assets and PacWest had $6.5 billion.
Thus, the post-merger regional bank has around $16 billion in assets and 80 branch locations throughout the state of California. PacWest has a market capitalization of $4.7 billion dollars.
Contrast this with one of my favorite regional bank stocks, People’s United Financial (Nasdaq: PBCT). People’s has more than double the assets at nearly $35 billion, but it has a market capitalization of just $4.5 billion.
Why does People’s have twice the deposits but a smaller market capitalization? The main reason is that PacWest’s valuation is considerably higher. It trades at a price-to-earnings (PE) ratio of 44.2, more than double that of People’s 18.1 P/E.
PacWest has paid a dividend every quarter since 2000, though the bank cut its dividend from $0.32 per share to $0.01 per share during the financial crisis. In 2011 it boosted its payout from $0.01 per share to $0.18 per share and bumped it up to $0.25 per share a year later.
In November the regional bank stock doubled its payout to $0.50 per share. Since post-merger PacWest is earning revenue on more than double the deposits of pre-merger PacWest, the 100% boost in PacWest’s dividend makes sense.
Still, the payout ratio is much higher than I’d like to see and I certainly wouldn’t consider this the safest dividend on the planet.
Here’s a look at the company’s quarterly revenue and payout ratio – the portion of earnings paid out to shareholders through dividends – over the last few years.

The major takeaway from this chart is that the payout ratio is high and has been rising over the past several years even as PacWest keeps increasing its dividend. A high payout ratio isn’t necessarily bad if it is stable or showing signs of decreasing. But a rising payout ratio can be a very bad sign, an early indicator that a dividend is simply not sustainable.
With the huge jump in revenue after merging with CapitalSource, the payout ratio appears to be stabilizing. Still, it will take a few quarters of a consistent or falling payout ratio to convince me that its dividend is safe.
News that the regional bank stock doubled its dividend is what first drew my attention to PacWest.
Certainly the idea of a rapidly growing dividend is appealing to almost any investor – especially an income investor. Regional banks are generally pretty strong right now and many are well prepared for the rising-rate environment we will see when the Federal Reserve begins raising interest rates.
But dividend stability is the most important thing for income investors and, when it comes to PacWest Bancorp, I’m not convinced that its quarterly payout is safe.

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