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Summary

• The regional bank has turned into a nice dividend growth play.
• It has 14 years of dividend growth under its belt.
• Currently, the shares yield 3.22%.

Someone looking to add some additional exposure to the financial sector in a dividend growth portfolio may want to take a look at the small regional bank Auburn National (NASDAQ:AUBN). With a market capitalization of roughly $100M, it is one of the smaller dividend growth plays out there. With a good history of dividend raises as well as operating performance, this small cap is definitely worth the deeper look.

AUBN is the holding company for Auburn Bank based in Auburn, AL. The bank was founded in 1907 and currently operates in several areas throughout East Alabama. It currently has 10 offices and 14 ATM locations in Alabama. The company offers a variety of banking services to both retail and commercial customers in the area.

As of March 31st, the company had total assets of $790M. It also had a Tier 1 capital ratio of 16.83%. With this Tier 1 ratio right off the bat, it is easy to identify that the company is considered to be well capitalized and healthy.

Looking at the dividend, it is clear that the company has become a dividend growth play. It has 14 years of annual dividend growth behind it. The last raise was a modest 2.3% increase from 21.5 cents quarterly to 22 cents quarterly. However, looking at the broader picture, it has been able to increase the dividend handsomely over the last 14 years. Breaking it down even further, the company has actually increased the dividend 19 of the last 20 years.

As of right now, the shares sport a yield of roughly 3.22%. This yield is a good fit for a dividend growth portfolio and is a decent high yield for a bank. In fact, out of a peer group of 16, it is the second highest yielding. Looking deeper into this peer group, Auburn National looks pretty good in terms of valuation as well. The peer group I looked at was other Southeast regional banks with market caps ranging from $50M to $300M.

(Source: Finviz)

Glancing at the above, it can be seen that compared with earnings shares of Auburn National are trading on the low range compared with peers. At roughly 13.3x earnings, the shares definitely present a good value. With ROE of 10.20%, it also looks better than most peers.

With a payout ratio of 42.2%, it is the second highest payout among peers. In general, I feel very comfortable with this payout ratio being below 50%, though. The dividend seems very sustainable especially when considering how well capitalized the company is.

Coming off the recession, it can be seen that the company had a less-than-stellar 2010. The payout ratio soared above 100% and income dropped to just around $2.5M. Since then, the company has recovered well having its best year ever in 2014. Record income came in at nearly $7.5M. In conjunction with net income, the payout ratio has also been on a good trend since 2010. Returning to highly safe levels ensure the company plenty of cushion space. As the payout ratio continues to decline, as the company expects, I foresee the dividend raises from the company to possibly become a little higher. The largest drawback right now is the little increases. I know for some dividend growth investors a 2.3% increase is not necessarily something to be excited over.

Nonetheless, the company remains a dividend growth play slowly making its way to aristocrat status. The reason I like the bank as a dividend growth play is of course the decent yield along with the interesting diversification it offers. Its core operating area happens to be home to Auburn University. This offers a unique economic environment for the company to operate in.

In conclusion, Auburn National is a small dividend growth play worth a look. Although the dividend has grown at a relatively slow pace, the company nonetheless continues with steady raises. With the payout ratio at roughly a 5-year low, I expect the company to have no problem to continue with further raises. Auburn National is an interesting dividend growth play because of its small size. It offers unique financial sector exposure to a dividend growth investor that is looking to add a bank other than the larger names.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.