KeyCorp Stock: This 42% Dividend Hike Is No Joke
An Overlooked Dividend Growth Stock for Income Investors
When it comes to paying dividends, being able to raise one’s payout every year is already considered a solid achievement. So when KeyCorp (NYSE:KEY) announced two dividend hikes in less than two months, it was quite a pleasant surprise.
Here’s a brief description of what happened.
From 2009 to 2017, KeyCorp has raised its quarterly dividend rate every single year—a very commendable feat indeed. By the beginning of 2018, the company had a quarterly dividend rate of $0.105 per share.
Fast forward to May 2018, and the company’s board of directors declared a cash dividend of $0.12 per share. This was a 14.3% increase from the prior payment. (Source: “KeyCorp Declares Increased Quarterly Common Dividend Of Twelve Cents Per Share,” PR Newswire, May 9, 2018.)
Then, on June 28, KeyCorp announced its 2018 capital plan, which included a 42% increase to its quarterly dividend rate from $0.12 per share to $0.17 per share. The U.S. Federal Reserve had no objection to the plan, so, in July, the company made it official by declaring the increased amount, which will be paid on September 14. (Source: “KeyCorp Announces Plan To Increase Common Stock Dividend And Share Repurchase Program,” PR Newswire, June 28, 2018.)
Trading at near $20.10 apiece, KEY stock has an annual dividend yield of 3.4%.
Dividend Growth Matters
Compared to the ultra-high yielders, KeyCorp’s payout may not seem like much. In my opinion, though, a company that can increase its dividend consistently should be just as worthy of consideration as a high-yield stock.
The reason lies in inflation. Prices have been on the rise. Based on data from the consumer price index (CPI), the same basket of goods that you bought for $100.00 in 2009 would cost $117.46 today. That’s a cumulative inflation rate of over 17%. (Source: “Inflation Calculator,” US Inflation Calculator, last accessed July 17, 2018.)
But if you are an income investor who owns companies like KeyCorp, this kind of inflation shouldn’t cause much of a concern. That’s because, from 2009 to today, KeyCorp stock has raised its quarterly dividend rate by 172%. (Source: “KeyCorp Dividend Date & History,” Nasdaq, last accessed July 17, 2018.)
In other words, high-quality dividend growth stocks can deliver inflation-proof income to their shareholders.
Why KeyCorp Can Deliver Oversized Dividend Increases
Now, you are probably wondering how the company managed to achieve this kind of payout growth. So let’s take a look at what KeyCorp actually does for a living.
KeyCorp is a bank holding company that operates through its subsidiary KeyBank National Association. The bank has been around for well over a century. Today, it has approximately 1,200 branches and over 1,500 ATMs. Through this network, KeyBank provides deposit, lending, cash management, and investment services to consumers and businesses in 15 states.
With total assets of approximately $137.0 billion, KeyCorp is actually one of the largest bank-based financial services companies in the country.
Long-time readers of Income Investors would know that banks are one of my favorite types of businesses. The industry has high barriers to entry. And most consumers already have their bank of choice. With an entrenched position in the regional banking industry, KeyCorp is well positioned to generate oversized profits.
Those profits have been growing, too. In the first quarter of 2018, KeyCorp’s net income from continuing operations totaled $402.0 million (or $0.38 per share). This was a substantial increase from a net income of $296.0 million, or $0.27 per share that the company earned in the first quarter of 2017. (Source: “KeyCorp Reports First Quarter 2018 Net Income Of $402 Million, Or $.38 Per Common Share,” KeyCorp, April 19, 2018.)
With growing profits, KeyCorp can afford to dish out increasing dividends. Indeed, the company’s net income of $0.38 per share earned in the first quarter of this year easily covered its quarterly dividend payment of $0.105 per share.
Bottom Line on KEY Stock
At the end of the day, keep in mind that paying a dividend is not the only way through which this bank holding company returns cash to investors. KeyCorp can also buy back its shares.
According to its 2018 Capital Plan, KeyCorp intends to start a new $1.2 billion share repurchase program. Such a program would reduce the number of shares outstanding, giving each existing KEY stock investor a slightly larger ownership stake of the company.
As it stands, KeyCorp looks like a solid pick for income investors.