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KeyCorp (KEY - Analyst Report) is the latest to join the list of banks coming up with dividend hikes after qualifying the stress test conducted by the Federal Reserve. The company declared a 66.7% increase in its quarterly common stock dividend to 5 cents per share. The dividend is payable on June 15 to shareholders of record as of May 29.

The hike reflects KeyCorp’s continuous effort towards maximization of shareholder value through its strong cash generation capabilities. Earlier, in July 2011, company had increased its dividend by an impressive 50% to 3 cents per share.

The capital plan submitted by KeyCorp to the Federal Reserve as a part of the stress test included a common stock repurchase program of $344 million and evaluation of a quarterly dividend hike.

In March 2012, KeyCorp’s capital plan got approved after clearing Fed’s stress test that involved assessment of banks’ capacities to withstand a severe economic crisis. After receiving the regulatory approval, KeyCorp decided to go ahead with the stock repurchase plan as well as the dividend hike.

Moreover, the Board of Directors at Keycorp announced a cash dividend of $1.9375 per share on the outstanding 7.750% Non-Cumulative Perpetual Convertible Preferred Stock, Series A, to holders of record as of May 31 for the period commencing on March 15 to the dividend payable date of June 15.

Similar moves by other banks

Several other banks, after clearing the stress test, declared dividend hikes and stock repurchase plans. Notable names include Northern Trust Corporation (NTRS - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report). Northern Trust declared a dividend increase of 7.1% and a $240 million stock repurchase program. Similarly JPMorgan announced a 20% hike in its dividend as well as a whopping $15 billion stock repurchase program.

Conclusion

We believe the dividend increase and extensive share repurchase plan will enhance investor confidence in the stock, thereby boosting the share prices. Moreover, returning capital to shareholders under apt circumstances will improve KeyCorp’s accessibility to long-term capital.

Shares of KeyCorp currently carry a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we are also maintaining a long-term ‘Neutral’ recommendation on the shares.

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