Last Friday’s announcement from the Federal Reserve allowing the top 19 banks — including BB&T (NYSE: BBT), JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C) — to raise shareholder dividends produced a strong rally. By the close of trading the leading banks – even those not having revealed dividend hikes – saw share prices jump by 1.5% to almost 5%.
Now many of those bank stocks are trading up before the open on Monday morning before the bell, a sign that the move could have a stabilizing effect on the market.
“Reinstating [and increasing] dividends is a big signal”, says Burt White, chief investment officer at LPL Financial LLC. The Fed move, coupled with strong actions taken by several of the leading banks, is a clear indicator that the sector has regained profit momentum, he adds. “The environment for core banking is positive, and [financial results] are going to be a surprise for the current quarter.”
In other words, the financial sector is looking up — and could be lifting the entire market along with it.
Dividend Details at the Big Banks
Within minutes following release of the Fed’s statement, several banks issued intent to hike dividends payable after the first quarter. A number of lenders also disclosed share buybacks and plans for stock issues to settle outstanding TARP loans. The banks thus far to have jumped into the dividend party include:
- BB&T (NYSE: BBT) lifted its quarterly dividend to 16 cents a share inclusive of a “special dividend” of one penny.
- J.P. Morgan Chase & Co. (NYSE: JPM) hiked its quarterly dividend by 20 cents to 25 cents a share.
- State Street Corp. (NYSE: STT) boosted its quarterly dividend from a penny to 18 cents a share.
- U.S. Bankcorp (NYSE: USB) increased its quarterly dividend to 12.5 cents a share from 5 cents.
- Wells Fargo & Co. (NYSE: WFC) announced a special dividend of 7 cents a share, boosting its total quarterly dividend to 12 cents a share.
Before the bell this morning, Citigroup (NYSE: C) also announce a reverse stock split of 10 to 1 and plans to reinstate its dividend in the second quarter.
Bank of New York Mellon Corp. (NYSE: BK), Fifth Third Bankcorp (NASDAQ: FITB), PNC Financial Services Group Inc. (NYSE: PNC) and KeyCorp (NYSE: KEY) have gained Fed approval for dividend increases but yet to make an announcement. Fifth Third says it will review a dividend increase this coming Tuesday, with PNC Financial saying it will do so at a board meeting to be held on April 7, while KeyCorp is expected to raise its quarterly dividend in May to 3 cents a share from the current penny.
Several banks also revealed plans with Fed approval to settle outstanding TARP commitments (partly through stock issues). SunTrust Banks Inc. (NYSE: STI) says it will pay back $4.85 billion in TARP funds which the bank expects to raise $1 billion through a stock offering (the lender plans to maintain its penny a share dividend). KeyCorp also plans on repaying $2.5 billion under TARP, which the bank hopes to partly fund by issuing $625 million in common stock.
Goldman Sachs Group Inc. (NYSE: GS) gained Fed approval to repurchase $5 billion of preferred stock issued to Berkshire Hathaway Inc. in 2008. In addition, J.P. Morgan unveiled a $15 billion share buyback (of which $8 billion will be committed this year), with Wells Fargo saying it will repurchase 200 million of its shares, and U.S. Bankcorp committing to a 50 million share buyback. New York Mellon also intends to repurchase an as yet undisclosed number of shares.
But Are Banks a Bargain or Overbought?
Todd Salamone, director of research at Shaeffer’s Investment Research, observes that, prior to the dividend announcements, bank stocks had been trading at full value in anticipation of improved 1-Q returns and Fed approval for the dividend hikes. “The next few months will give better indication of where the sector is going and what impact the new regulations will have on earnings and revenue growth.”
Indeed, Erik Oja, U.S. banking analyst at Standard &Poor’s Equity Research Services is sceptical of the immediate business growth prospects of the banks under the Dodd-Frank Act and the Consumer Protection Act. Both pieces of legislation, which came into effect last year, restrict consumer lending and service fees – areas which had traditionally been highly lucrative profit centers for the banks. Revenue gains remain the biggest challenge for the banks, Oja observes, with growth likely to remain in the single digits this year. “Growth is coming from the largest banks with the most lines of business as well as boutique banks,” he adds.
In short, while stocks in the financial sector appear to be looking up in the short-term, it’s buyer beware.
The dividends seem safe, however, even if shares do roll back after the recent pop. Although the latest round of stress tests has seen the financial collar loosened on the banks, the Fed seems intend on keeping a tight leash by limiting dividends to a maximum of 30% of anticipated earnings (this applies to 2011). That’s conservative enough to prevent these big increases from becoming big cuts anytime soon.
But as we’ve learned in recent years, anything can happen down the road.
As of this writing, Sean van Zyl did not own a position in any of the stocks named here.