Dividend Kings In Focus: Farmers & Merchants Bancorp

Updated on September 30th, 2022 by Quinn Mohammed

The Dividend Kings consist of companies that have raised their dividends for at least 50 years in a row. Many of the companies have turned into huge multinational corporations over the decades, but not all of them. You can see the full list of all 45 Dividend Kings here.

We also created a full list of all Dividend Kings, along with relevant financial statistics like dividend yields and price-to-earnings ratios. You can download the full list of Dividend Kings by clicking on the link below:

Farmers & Merchants Bancorp (FMCB) has paid uninterrupted dividends for 87 consecutive years and has raised its dividend for 57 consecutive years. And yet, it has remained a relatively small company, trading at a market capitalization of just ~$742 million.

Despite its small size, the company has many things going in its favor, and shareholders will likely see solid returns. The stock’s 1.6% dividend yield is slightly lower than the broader market’s 1.8% yield, but there is room for more dividend raises down the road.

Business Overview

F&M Bank was founded in 1916. It operates 32 branches across California’s Central Valley and East Bay areas. F&M Bank is a full-service community bank and thus offers loans, deposits, equipment leasing, and treasury management products to businesses, as well as a full range of consumer banking products.

Despite operating just 32 branches, F&M Bank has significantly grown its asset base. In fact, total assets have grown by 12.5% annually since 2012. And thanks to its prudent management, F&M Bank exhibited remarkable resilience amid the pandemic and during previous downturns.

The company is conservatively managed and, until six years ago, had not made an acquisition since 1985. However, in the last six years, it has aggressively pursued growth. It acquired Delta National Bancorp in 2016 and increased its locations by 4. Moreover, in October 2018, it completed its acquisition of Bank of Rio Vista, which has helped F&M Bank to further expand in the San Francisco East Bay Area.

Source: Investor Presentation

On July 21^st, 2022, F&M Bank reported financial results for the second quarter of fiscal 2021. F&M Bank grew its earnings-per-share by 15% year-over-year, from $20.45 to a new all-time high of $23.58.

Net interest income grew 12%, thanks to loan growth and net interest margin expansion. F&M Bank has booked provisions for loan losses equal to only 1.9% of its total portfolio, thanks to its conservative portfolio.

Management remains optimistic for the foreseeable future, as rising interest rates are likely to significantly enhance the bank’s net interest margin. We reiterate that F&M Bank is one of the most resilient banks during downturns, such as the great financial crisis and the pandemic.

Growth Prospects

As previously mentioned, F&M Bank has pursued growth through acquisitions over the last several years after a long period of no acquisition activity stretching back to the 1980s. It acquired Delta National Bancorp in 2016, and thus it increased the number of its locations by 4. Moreover, in late 2018, it acquired Bank of Rio Vista and thus expanded in the San Francisco East Bay Area.

And more recently, F&M Bank acquired Perpetual Bank Federal Saving Bank and Ossian Financial Services, Inc. in 2021. In June 2022, the company also announced the acquisition of Peoples-Sidney Financial Corporation.

F&M Bank has grown its earnings per share at a 12.1% average annual rate since 2012. However, it has enjoyed some non-recurring tailwinds over this period. In 2018, the bank benefited from a steep reduction in the corporate tax rate and grew its earnings per share by 60%. In addition, in 2019, it greatly benefited from its acquisition of Bank of Rio Vista. As a result, investors should not count on double-digit earnings growth in the upcoming years. However, with the recent rise in interest rates, F&M Bank has begun aggressively pursuing growth.

In general, higher interest rates are a tailwind for banks and individuals with high amounts of assets that therefore earn high returns. Moreover, when interest rates are high, the spread between banks’ lending rate and borrowing rate increases and thus expands their net interest margin, which is a key component of their earnings.

Overall, we expect F&M Bank to grow its earnings per share by approximately 5% per year over the next five years, thanks to the consistent growth of its asset and loan portfolios, a possible increase in the number of its physical locations, and higher interest rates over this time horizon.

Competitive Advantages & Recession Performance

F&M Bank is not a big bank at all — the company’s market cap is just several hundred million dollars. The bank nevertheless has been a solid performer for a very long time, and it remained stable during the last financial crisis

F&M Bank’s net earnings declined minimally during the 2008-2009 recession, with profits dropping by about ten percent. That greatly contrasts with what other banks had to report during that time. Earnings-per-share during the Great Recession are below:

• 2007 earnings-per-share of $28.05
• 2008 earnings-per-share of $28.69 (2.3% increase)
• 2009 earnings-per-share of $25.57 (11% decline)
• 2010 earnings-per-share of $27.05 (5.8% increase)

Major banks suffered earnings declines of 80% or even more during the great financial crisis. F&M Bank, with its focus on community banking and not on more speculative, riskier businesses, has been a much safer investment during those troubled times.

As F&M Bank has not made any changes to its business model since then, it is still exceptionally resilient to recessions, at least relative to most banks. The bank currently has a tier 1 capital ratio of 8.8%, which results in the regulatory classification of “well capitalized” and has extremely few non-performing loans. It is thus one of the most resilient banks in the ongoing downturn caused by the rapid increase in interest rates.

The conservative management of F&M Bank results in slower growth during periods of economic growth but results in higher long-term returns thanks to the superior returns during rough economic periods when most banks see their earnings collapse. The prudent management of F&M Bank also helps explain its exceptional dividend growth streak. Most banks operate with high leverage. Consequently, their earnings slump during downturns, and thus they cannot sustain multi-year dividend growth streaks.

Source: Investor Presentation

F&M Bank is a low beta stock. This means that the stock price does not decline much in a market downturn, which makes F&M Bank a relatively stable, non-volatile holding. This feature is paramount during broad market sell-offs, making it easier for investors to avoid panic selling and maintain a long-term investing perspective.

Valuation & Expected Returns

Based on a share price of $956 and expected earnings per share of $90.00 this year, F&M Bank is trading at a price-to-earnings ratio of 10.6.

The stock has traded at an average price-to-earnings ratio of 13.8 over the last decade, but we assume a fair earnings multiple of 12.0 due to the small market cap of the stock. If F&M Bank reaches our fair value estimate over the next five years, it will enjoy a 2.5% annualized gain in its returns thanks to the expansion of its valuation level.

Total returns are also comprised of share price gains and the dividends a stock pays. F&M Bank currently yields 1.6%, which is just below the S&P 500’s average dividend yield.

Given 5% expected earnings-per-share growth, the 1.6% dividend, and a 2.5% annualized expansion of the price-to-earnings ratio, we expect F&M Bank to offer a 9% average annual return over the next five years.

Final Thoughts

Due to its small market cap, F&M Bank passes under the radar of most investors. This is unfortunate, as F&M Bank is an exceptionally well-managed company that has also begun to aggressively pursue growth in the last few years.

Thanks to its resilience to recessions, F&M Bank offers a compelling risk-adjusted expected return, and thus it is an attractive candidate for those who want to gain exposure to the financial sector. For the time being, though, we rate FMBC as a hold.

The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors: