Image Source: Pixabay

There is no exact definition for blue chip stocks. We define it as a stock with at least ten consecutive years of dividend increases. We believe an established track record of annual dividend increases going back at least a decade shows a company’s ability to generate steady growth and raise its dividend, even in a recession.

As a result, we feel that blue chip stocks are among the safest dividend stocks investors can buy. This article will analyze First of Long Island Corp. (FLIC) as part of the 2022 Blue Chip Stocks In Focus series.

Business Overview

The First of Long Island Corporation is the holding company for The First National Bank of Long Island. This small-sized bank provides a range of financial services to consumers and small to medium-sized businesses. Its offerings include business loans, consumer loans, mortgages, savings accounts, etc.

FLIC operates around 50 branches in two Long Island counties and several NYC burrows, including Queens, Brooklyn, and Manhattan. FLIC was a history of almost 100 years since being founded in 1927, and the company is headquartered in Glen Head, New York.

Source: Investor Presentation

On July 28, 2022, the company reported the second quarter and six months results for Fiscal Year (FY) 2022. Net income for the first six months of 2022 was $24.6 million, an increase of $1.9 million, or 8.4%, versus the same period last year.

The increase is primarily due to growth in net interest income of $4.9 million, or 9.2%, and noninterest income of $695,000, or 12.1%, excluding 2021 securities gains. These items were partially offset by increases in the provision for credit losses of $2.8 million and income tax expense of $364,000.

Net income for the second quarter of 2022 of $12.5 million increased $1.1 million, or 9.6%, from the $11.4 million earned in the same quarter of last year. The increase is mainly due to growth in net interest income of $2.8 million, or 10.3%, for substantially the same reasons discussed above concerning the six-month periods.

The corporation’s balance sheet remains strong, with a leverage ratio of approximately 9.9%. The company repurchased 488,897 shares of common stock during the first half of 2022 for $9.8 million. The management team expects to continue common stock repurchases during 2022.

The company ROE was 12.9% and 12.4% for the three-month and six-month periods ended June 30, 2022, respectively, an increase compared to 11.0% and 11.1% for the same periods in 2021. The increases in ROE were due to higher net income for both periods.

The company continues to focus on strategic initiatives supporting the growth of its balance sheet and its profitable relationship with the banking business.

Such initiatives include improving the quality of technology through continuing digital enhancements, optimizing its branch network across more extensive geography, using new branding and “CommunityFirst” focus to improve name recognition, enhancing its website and social media presence, including the promotion of FirstInvestments, and recruitment of experienced banking professionals to support the company's growth and technology initiatives.

Growth Prospects

The company’s earnings per share have grown consistently over the last decade, with an annual increase of 5%, though its growth rate has been uneven. Their dividend yield has grown even faster, at a 10-year average annual rate of more than 7%. We expect the company to increase future earnings at a 4% rate over the next five years.

Also, revenues roughly doubled over the last decade, as the bank was able to expand its presence in its markets while also generating higher revenues per branch during that time frame. Low-interest rates, which are generally seen as a headwind for banks because they usually go hand in hand with low net interest margins, have not been a significant headwind for the company.

The company has been decreasing its share count throughout the years, and this has helped the company to continue to increase earnings.

Source: Investor Presentation

Competitive Advantages & Recession Performance

FLIC is a small regional bank focused on New Jersey and some burrows of New York. As such, it has benefited from a growing population and a strong housing market in its active areas. One could therefore say that it has a competitive advantage in terms of being focused on an attractive geographical market, although FLIC does not enjoy large-scale benefits.

Nevertheless, FLIC has solid fundamentals, including an above-average return on equity of ~11% and robust loan stability, with below-average credit charge-offs, even during the current crisis. During the Great Recession, FLIC performed better than many of its peers, proving the below-average level of risk.

You can see a rundown of First of Long Island Corporation’s earnings-per-share from 2007 to 2011 below:

• 2007 earnings-per-share of $0.67.
• 2008 earnings-per-share of $0.79 (18% increase).
• 2009 earnings-per-share of $0.82 (3% increase).
• 2010 earnings-per-share of $1.02 (25% increase).
• 2011 earnings-per-share of $0.98 (4% decrease).

First of Long Island Corporation was remarkably resilient during the Great Recession. It only suffered a 4% decline in 2011 after the Great Recession, which is impressive considering that this company is in the financial industry.

The company once again performed well in 2020, a year in which the U.S. economy entered a recession due to the pandemic. And yet, First of Long Island Corporation continues to increase its dividend reliably each year, including a 5.3% increase in 2022.

The company has an outstanding balance sheet. The company sports a debt-to-equity ratio of 0.6 and a long-term debt-to-capital ratio of 44.1.

Valuation & Expected Returns

Over the past ten years, the company has tended to average a PE ratio of 14.5x earnings. However, we think a PE of 12x earnings is better suited for this company.

The company currently sports a PE of 9.5x 2022, with expected earnings of $2.11 per share. Thus, the company's stock looks undervalued at the current price. If the stock price were to revert to a PE of 12 over the next five years, this would provide the investor with an annual rate of return of 5.4% over the next five years.

Combining the current dividend of 4.2% and an expected earnings growth of 4% over the next five years would give us a 13.6% annual return. As you can see below, if an investor brought $100 worth of shares on Jan. 1, 2012, while reinvesting the dividend, the return would have been over 100%.

Source: Investor Presentation

Final Thoughts

The First of Long Island is not a large bank, but it is active in an attractive regional market and operates quite profitably. FLIC has not been a high-growth business in the past, but through a combination of dividends and some earnings growth, returns have still been solid. Based on our total return estimates, FLIC seems like an attractive stock right here, and its valuation is below our fair value estimate. We thus rate FLIC a buy at current prices.

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