Farmers & Merchants Bancorp: A Dividend King With 51 Years Of Dividend Increases (Part 17 Of 18)

This is the seventeenth in a series of articles that will take a look at the dividend Kings, companies that have paid an increasing dividend for 50 or more years. So far this series of articles has produced companies that range from small cap to large cap with varying dividend growth rates from 1% to 26%. I really expected all of these companies to be good investments but some of them disappointed me, so on with the study. This article is about Farmers & Merchants Bancorp (OTCQX:FMCB) and why it’s a good total return investment and fair dividend growth company that has increased its dividend for 51 years making it a dividend King. The company has in the last 43.5 months had a above average total return and has a above average yearly dividend at 2.2% with a dividend growth rate of 5.43%. Farmers & Merchants Bancorp is the bank holding company for Farmers & Merchants Bank of Central California. The Company markets its services to small and medium sized businesses, and also offers a range of retail banking services to the local consumer market. Farmers & Merchants Bancorp is being reviewed using The Good Business Portfolio guidelines. Fundamentals of Farmers & Merchants Bancorp will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter’s Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.

Good Business Portfolio Guidelines

Farmers & Merchants Bancorp passes 7 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article “The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review” These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, dividend growth, and growing companies that keeps me ahead of the Dow average.

Farmers & Merchants Bancorp is a small-cap company with a capitalization of $475 Million. The size of Farmers & Merchants Bancorp earnings of $9.25/share (second quarter 2016) from its banking business, allows it to pay its above average dividend and have cash to buy other small banks. Farmers & Merchants Bancorp fails my minimum capital test and my never buy a bank guideline, but has great total return and may be of interest for a investor that likes to take risk of having a small company that can grow.

Farmers & Merchants Bancorp has a dividend yield of 2.2% which is above average for the market. The dividend has been increased for 51years and its dividend is safe. The payout ratio is 28% which leaves plenty of cash to pay its dividend, and have capital for further investments to maintain the company’s business growth. Farmers & Merchants Bancorp is therefore a fair a choice for the dividend growth investor with a DGR of 5.43%, and the dividend is slightly above average with total return above the DOW baseline making Farmers & Merchants Bancorp a good total return growth investment to keep you ahead of the market.

Farmers & Merchants Bancorp last quarter’s earnings cash flow is good at $6.01/share and leaves plenty of cash after paying its above average dividend and for maintaining and growing its business. This good cash flow allows the company to have cash available for buying small bolt on banks.

I also require my growth rate going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Farmers & Merchants Bancorp has a 10 year backward CAGR of 4.38% below my requirement. Looking back five years $10,000 invested five years ago would now be worth $15,500 today. This makes Farmers & Merchants Bancorp a fair choice for the total return investor. In the long term Farmers & Merchants Bancorp above average dividend and its growing business in the banking sector is a good choice for the total return investor with its above average total return. The PE is a bit high at 16 for a bank.

Total Return and Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Farmers & Merchants Bancorp had better total return than the Dow baseline in my 43.5 month test period. I chose the 43.5 month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance to see how the company does in good and bad markets.

This above average total return of 59.91% for Farmers & Merchants Bancorp compared to the DOW baseline of 41.77% makes Farmers & Merchants Bancorp a good investment for the total return investor. Farmers & Merchants Bancorp has done better than the economy over the test period and has a dividend growth rate of 5.43% over the past 10 years. Year to date total return is 11.11% well ahead of the DOW gain so far this year. The dividend is above average at 2.2% and has been increased for 51 years making the company a dividend King. On May 18, 2016 Farmers & Merchants Bancorp raised its dividend by 0.8% to 6.55/semi-annual. I added a guideline for total return mainly when I am looking at a high yield company as a test to see if the yield and price change really does beat the market. For Farmers & Merchants Bancorp it shows that it is a great steady company having a beat of the DOW by 18% for my test period.

DOW’s 43.5 month total return baseline is 41.77%

Company Name	43.5 Month total return	Difference from DOW baseline	Yearly Dividend percentage
Farmers & Merchants Bancorp	59.91%	18.14%	2.2%

Last Quarter’s Earnings

For the last quarter Farmers & Merchants Bancorp reported earnings on July 25, 2016 that beat expected earnings at $9.25 compared to last year at $8.59. Net investment interest was up at $23.4 Million increasing by 11.7% year over year. This was a good report showing the increased revenue and increasing earnings. This leaves plenty of cash remaining after paying the $6.55/semi-annual dividend for business expansion. Earnings for the next quarter will be released in late October and is estimated to be at $9.71/share compared to last year at $8.96/share, showing continued growth going forward.

Company Business Overview

Farmers & Merchants Bancorp is the bank holding company for Farmers & Merchants Bank of Central California (the Bank). The Company markets its services to small and medium sized businesses, and also offers a range of retail banking services to the local consumer market. It also offers a range of services for its commercial accounts, which include a credit card program for merchants, lockbox and other collection services, account reconciliation, investment sweep and online account access. Its primary service area is the mid Central Valley of California, including Sacramento, San Joaquin, Stanislaus and Merced counties, where it operates approximately 24 full-service branches and one standalone automated teller machine (ATM). Its service area includes Sacramento Metropolitan Statistical Area (NYSE:MSA), with branches in Sacramento, Elk Grove and Galt; Stockton MSA, with branches in Lodi, Linden and Stockton, and Modesto MSA, with branches in Modesto and Turlock.

Farmers & Merchants Bancorp loan investments are strong with only 0.11% of total loans non-performing. The bank has the highest regulatory classification of Well Capitalized, the bank is very conservative in the loans it makes. Farmers & Merchants Bancorp is in the process of buying Delta National Bancorp which should close in the 4th quarter of 2016. The management remains positive in their outlook for the second half of 2016 as the economy shows signs of strengthening in the California Central Valley.

One of my guidelines is that you understand the company business of the company, on this Farmers & Merchants Bancorp fails, I understand the business but not the accounting. Also another of my guidelines says never buy a bank small or large, you can’t figure out what the assets are worth. Farmers & Merchants Bancorp got hurt in the 2008-2009 great recession and is just now coming back.

FMCB data by YCharts

Takeaways and Recent Portfolio Changes

Farmers & Merchants Bancorp is a good choice for the dividend growth investor increasing its dividend for 51 years with a above average dividend yield of 2.2%. Farmers & Merchants Bancorp beat the total return compared to the Dow average and is a good choice for the total return growth investor. The business is growing at 4.38% CAGR ( 10 year backward) . Farmers & Merchants Bancorp is in the banking business which If you don’t already have a position in that sector Farmers & Merchants Bancorp could be worth a position for your total return segment of your portfolio, if you like to take risks with a relatively small bank. If you decide to invest in Farmers & Merchants Bancorp be careful when you place the order, the company is very thinly traded, less than a hundred shares a day.

Farmers & Merchants Bancorp is one company I am not pleased with as a solid long term company for me and it will not be bought for The Good Business Portfolio because it breaks to many of the Good Business Portfolio Guidelines and I don’t buy banks no matter how good the fundamentals are. I limit the portfolio to 25 companies because I cannot keep track of more than that. The Portfolio has a few companies that I intend to trim and sell over the next year and this will open the portfolio to some of the other dividend kings that have been evaluated by this study.

Sold some Cabela’s (NYSE:CAB) covered calls, sold September $52.5’s. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that CAB goes up so I can sell the calls again in the same month for a Double.

Sold portfolio position in Kroger Co. (NYSE:KR), its gains going forward are weakening and has not performed short term like I expected.

Trimmed Harley Davidson (NYSE:HOG) from 5.8% of the portfolio to 5.5%.

Bought starter position of Digital Reality Trust (NYSE:DLR) of 0.52% of the portfolio. I feel the computer industry facilities business has nowhere to go but up and DLR pays an above average dividend. I wrote an article on Digital Reality Trust in April of this year if you are interested.

Sold some covered calls on Harley Davidson , sold August 50’s. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. The HOG price is presently above the strike price and I have moved the calls up and out. On August 10 the portfolio moved the HOG calls up and out to November 52.5’s.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (NYSE:JNJ) is 8.6% of the portfolio, Altria Group Inc. (NYSE:MO) is 7.8% of the portfolio, Home Depot (NYSE:HD) is 8.0% of portfolio and Boeing (NYSE:BA) is 7.8% of the Portfolio, therefore JNJ and HD are now in trim position with Boeing and Altria getting close.

Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the 2015 fourth quarter earnings call. For BA from the second 2016 earnings call deferred costs increased $33 Million a small amount and I project positive cash from the 787 program in the third quarter of possibly $100 Million. The KC-46A refueling plane has been authorized for its initial production, this will be a big step to increase Boeing’s already high cash flow even more. The contract has still to be awarded, which should be soon.

JNJ will be pressed to 9% of the portfolio because it’s so defensive in this post Brexit world.

For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.

I have written individual articles on AA,CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long BA, HD, CAB, JNJ, MO, OHI, DLR, HOG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stock Plaza). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.