In this special 5-part series of articles, Bob Ciura counts down his current five top "Buy & Hold Forever" dividend stocks. The editor of Sure Dividend concludes his review with a look at his favorite pick — Farmers & Merchants Bancorp (FMCB).
FMCB is a Dividend King with a solid yield, consistent dividend growth, and high expected returns in the coming years. It is a locally-owned and operated community bank with 32 locations in California.
It is a small-cap bank, with a recent market capitalization of $720 million. Nevertheless, F&M Bank has paid uninterrupted dividends for 89 consecutive years and has raised its dividend for 59 consecutive years.
Recent Events
In mid-July, F&M Bank reported financial results for the second quarter of fiscal 2024. The bank grew its adjusted earnings per share by 5% over the same quarter last year, from $28.03 to $29.39. It posted 5% growth of loans and flat deposits. Net interest income declined 3% due to a contraction of net interest margin from 4.28% to 3.91% amid higher deposit costs.
Growth Prospects
FMCB is not a high-growth company. It is a prudently managed bank, and has always targeted a very strong capital ratio. As an example, the bank currently has a total capital ratio of 14.6%, which results in the highest regulatory classification of well capitalized banks. Its credit quality remains exceptionally strong, as there are extremely few non-performing loans and leases in its portfolio.
The more conservative management results in lower leverage, and as a result, slower growth than more-leveraged banks during boom times. On the other hand, this protects banks like FMCB from recessions, which is why the company has grown its dividend each year for over 50 years. Overall, we expect 5% annual EPS growth over the next five years for FMCB.
Valuation & Expected Returns
Future returns will consist of the stock’s EPS growth, changes in the valuation multiple, and dividends.
FMCB stock trades for around 7.9 times our EPS estimate for this year of $122. With the price-to-earnings ratio below our long-term fair value estimate of 12, the rising P/E multiple could add 8.7% to annual returns over the next five years.
We also expect FMCB to increase EPS by 5% per year going forward. FMCB has also increased its dividend for 59 consecutive years. Shares were recently yielding 1.8%. The company’s dividend is highly secure. The annualized dividend payout of $17.60 per share represents a dividend payout ratio of approximately 14% for 2024.
This indicates a very strong level of coverage for the dividend, giving it plenty of cushion for future dividend increases. Overall, total returns could reach 15.5% per year over the next five years, making FMCB stock our top-ranked "buy and hold forever" dividend stock right now.
