PNC Hikes Div, To Buyback Shares

There is finally something official for the shareholders of PNC Financial Services Group Inc. (PNC - Analyst Report) to cheer for. The company has announced a 14% hike in its quarterly dividend. Moreover, PNC Financial also intends to buy back up to $250 million of common stock under its existing 25 million share repurchase program during the remainder of 2012.

The Details

The increased quarterly cash dividend now stands at 40 cents per share, up 5 cents from 35 cents paid earlier. This new dividend payment date is May 5, 2012, payable the next business day, to shareholders of record as of the close of business April 17, 2012.

Moreover, the company plans to buy back up to $250 million of common stock under its existing 25 million share repurchase program. The shares will be purchased through open market or privately negotiated transactions through the rest of 2012. PNC Financial’s existing share repurchase program came in effect on October 4, 2007 and bears no termination date. Currently, the program has 24.7 million shares remaining.

Not a Surprise

The dividend increase and share buyback does not come as a surprise for the investors of PNC Financial and in fact they were only waiting for an official announcement about the magnitude of the hike and the amount of share buyback.

Only last month, PNC Financial had announced that it got the nod from the Federal Reserve to hike its common stock dividend. In the latest round of stress tests, the Fed reviewed PNC Financial’s capital plan and did not object to any of the capital actions proposed by the company. Moreover, the company also projected a moderate share buyback program under its existing common stock repurchase authorization.

Our Take

We believe that the stress test clearance is a testimony to PNC Financial’s solid capital position. With its proven cash generating capacities, the company remains committed to increasing shareholders’ wealth through dividend increases and share buybacks. Its cash and due from banks, standing at $4.1 billion as of December 31, 2011, position it well to enhance its long-term shareholder value.

Notably, in April 2011, PNC Financial increased its quarterly common stock dividend to 35 cents per share from 10 cents following its capital plan approval by the Fed. We believe such a shareholder-friendly approach will give a fillip to investors’ confidence in the stock.

Besides PNC Financial, the other major banks on Wall Street that have cleared the stress test requirements – and therefore increased their capital redeploying efforts through dividend increases and share buybacks – include JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and U.S. Bancorp (USB - Analyst Report).

For PNC Financial, we believe that its strengthening of balance sheet, with focus on risk and expense management, should propel the company’s earnings ahead. Lately, the company completed the purchase of RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada (RY - Snapshot Report).

The acquisition facilitated PNC Financial to expand its footprint in the Southeast markets by adding over 400 branches to its network. It marked PNC Financial's seventh successful acquisition in the past eight years. PNC Financial expects the acquisition to be immediately accretive to earnings (excluding integration costs).

Yet, the top-line headwind is expected to remain in the near term, with the sluggish economic recovery and a low interest rate environment. Alongside, the regulatory issues also remain a concern.

PNC Financial shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation. Considering its fundamentals, we also have a Neutral recommendation on the stock.