If This Stock Offered You a 66% Dividend Cut Would You Hold It?

Rarely does a dividend slashing amount to a good deal for shareholders.

Sep 06, 2024

Source: created by author with Bing Image Creator. The Grim Reaper comes for the stock investor.

How’s that for an understatement? For dividend-growth investors, always in the game for a dividend increase, a dividend cut, especially a massive 66% reduction, is like the kiss of death. The Grim Reaper came with his scythe to slash and burn FLIC investors’ dividend income.

This accounts for the reason we counseled our subscribers to sell their shares on 9/5/24 in First of Long Island (FLIC), a smallish commercial bank located on Long Island, NY.

The Catalyst

(Reuters) -”ConnectOne Bancorp has agreed to buy smaller peer First of Long Island in an all-stock deal valued at $284 million, the companies said on Thursday.

The deal will create a combined bank with about $14 billion in total assets and bolster ConnectOne's presence in New York City.
First of Long Island shareholders will receive 0.5175 shares of ConnectOne for each held, valuing the lender at $12.40 per share, based on ConnectOne's last close.
The offer represents a 0.8% discount to First of Long Island's last close.
"We are excited to bring together two highly complementary, commercially focused banks to create a truly premier New York-metro community bank," said ConnectOne CEO Frank Sorrentino III.
Sorrentino said the deal would also accelerate the bank's Long Island growth strategy. ConnectOne opened its first Long Island branch in 2018.
The deal underscores the growing consolidation trend within the regional banking sector as lenders seek strategic partnerships to scale operations and gain a competitive edge.
As part of the deal, First of Long Island CEO Chris Becker will become vice chairman of ConnectOne.
The deal is expected to close in mid-2025, with projections to boost ConnectOne's earnings per share by 36% in 2025 on an adjusted basis.
First of Long Island, which has $4.2 billion in total assets, is liable to pay a $11.8 million termination fee if the deal fails to go through due to a competing acquisition offer.
Keefe, Bruyette & Woods and Piper Sandler were the financial advisers to ConnectOne and the First of Long Island, respectively.”
-Reuters

What This Means for FLIC Investors

We counseled subscribers to buy 1500 shares, just as we did in our RODAT subscriber portfolio, on 6/14/24. This was less than 3 months ago. At that time, we paid just $9.32 per share on investor’s knee-jerk reaction to a poor earnings report. This brought the bank’s $.84 dividend to an accidentally high 9.0% yield for us. We reasoned that with an interest rate cut from the Fed only a month or so away, it would be an opportune time to accumulate shares at an excellent discount with excellent income potential ahead. Banks normally do better with lower interest rates which gives them the opportunity to increase their spread between what they pay to depositors and how much they can earn on investing depositor’s money.

Here’s The Skinny

On the morning of the announced takeover, the target’s shares (FLIC) were trading higher. The target usually trades higher while the acquirer normally trades lower.

We did the math. If we held our 1500 shares of FLIC till the takeover commenced, mid 2025, we’d receive .5175 shares of CNOB for every share of FLIC we held.

.5175 X 1500 share of FLIC = 776 shares of CNOB.

Former income from FLIC:

1500 shares X $.84 = $1260.00

Future Projected Income from CNOB:

776 shares of CNOB X $.72 = $558.72

Future Income of $558.72 -Former Income of $1260 = $ -701.28

To Accept or Not to Accept: That is the Question

Though CNOB has a 30 year history of paying a solidly growing dividend, they did cut the dividend by 66% in 2009 during the financial crisis, and let it sit there for quite a number of years before raising it.

At first blush, it didn’t seem wise to take a thrashing on annual dividend income that would leave us $701.28 poorer every year from now on.

The Clincher

Further mathematical analysis revealed a better way forward. Rather than accepting a permanent, huge cut to our annual income, we could do better, much better.

By taking a massive $5025.00 profit or 36% capital gain on this position, then reinvesting all proceeds, we could easily increase our annual dividend income. After all, we are dividend-growth investors, seeking every avenue to grow our income for retirement.

Proceeds of the sale:

1500 shares @ $12.67 = $19,005

Original cost of shares:

1500 sharers X $9.32 = $13,980.00

Reconciliation:

$19,005 -$13,980 = $5025 realized profit, or 36% gain.

If we reinvest these proceeds in an 8.0% yielder:

$19,005 X.08 = $1520.00

Possible Increase in Annual Dividend Income

$1520- $1260= $260.00 increase in annual dividend income

Bottom Line

It’s crystal clear. Why would an income investor take a 66% cut in annual income amounting to an annual reduction in income of $701.28, when the sale and reinvesting of proceeds in this stock could easily add $260.00 to our annual income?

An increase is always better than a decrease. Do you agree? Please leave a comment in the comment section to let me know what you think of this analysis.

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