Why the Bendigo and Adelaide Bank Ltd share price crashed 4% this morning

Bendigo and Adelaide Bank Ltd (ASX:BEN) tumbled despite posting a better-than-expected full year result. If you blinked you would have missed the reason for the sell-off.

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If you thought the market is becoming less focused on dividends this reporting season, you'd only need to take a look at the walloping Bendigo and Adelaide Bank Ltd (ASX: BEN) is taking.

Australia's fifth largest retail bank crashed 4.4% to a one-and-a-half-month low of $12.40 in late morning trade despite posting a better-than-expected full year profit.

However, investors were quick to hit the sell button after management declared a 33 cent final dividend, taking its full year payout to 66 cents.

While that's two cents above what it paid in 2013-14, the market was expecting at least a cent more and companies should know better than to mess with yield-hungry investors.

Then there's the margin squeeze. Net interest margin fell 4 basis points (or 0.4 of a percentage point) from a year ago to 2.2% but has fallen 7 basis points in the second half of 2014-15 compared to the same period in 2013-14.

The fall in margin is driven by a number of factors including competitive pressures and the two interest rate cuts by the Reserve Bank of Australia since the start of the calendar year.

Investors are particularly sensitive to movement in the bank's margin because of its lack of pricing power compared to the Big Four banks, which includes Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

Suddenly Bendigo and Adelaide Bank's 13.1% increase in underlying cash earnings to $432.4 million for the 12 months to end June 2015 just didn't look that appealing anymore.

Cash earnings per share (EPS) only grew by 3.9% to 95.1 cents due to its capital raising but that's well known by the market and EPS is still 3% above consensus.

But the stock just doesn't look attractive enough on fundamentals. Whether you compared Bendigo and Adelaide Bank on a 2015-16 forecast price-earnings or dividend yield basis, it doesn't stack up as well as the Big Four – particularly when you consider its weaker market position.

I would think about rotating out of Bendigo and Adelaide Bank and buying NAB shares instead.

On the upside, Bendigo and Adelaide Bank's recently acquired Rural Finance Corporation is performing better than what management was expecting and the business has significantly expanded the bank's reach into the agriculture sector.

The rural sector contributed to around 16% of group cash earnings while 50% of earnings come from its retail banking operations.

But if you are looking for good dividend paying stocks, you should look beyond the banks. Sign up below to get your free report from the Motley Fool on the best income stock to own for 2015-16.

Motley Fool contributor Brendon Lau owns shares of Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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