Hike in Fifth Third's Dividend

Ushering in good news for the shareholders of Fifth Third Bancorp ( FITB - Analyst Report ) , the company announced a 25% hike in its third quarter dividend yesterday. It will now pay a cash dividend on its common shares of 10 cents per share, up from 8 cents paid earlier. The enhanced dividend will be paid on October 18, 2012 to shareholders of record as of September 28, 2012.

This move represents an increase in dividend for the third time post the dividend cuts made by Fifth Third during the financial crisis. The company had drastically slashed its dividend to 15 cents per share from 44 cents in June 2008 and further lowered it to a penny in December that year. However, in March last year, the company raised it to 6 cents and further advanced it to 8 cents in September.

This latest dividend hike comes after Fifth Third’s proposed capital plan through March 2013 received the Federal Reserve’s nod last month, which included a possible increase in its dividend in the third quarter as well as share buybacks. The approval, which comes following a review of Fifth Third’s resubmitted capital plan, justifies the company’s capital strength.

As a matter of fact, though a number of Wall Street biggies such as U.S. Bancorp ( USB - Analyst Report ) and Wells Fargo & Co. ( WFC - Analyst Report ) , passed the stress test earlier this year with their proposed capital plans, companies such as Fifth Third and Citigroup Inc. ( C - Analyst Report ) faced a setback as the Fed objected to their capital plans and these companies had to resubmit it again.

In addition to a positive development on the dividend front, last month Fifth Third’s Board of Directors approved a new share buyback authorization of 100 million shares. This replaced the previous authorization from 2007 that had 14 million shares remaining.

As a matter of fact, Fifth Third’s capital plan includes potential share repurchases of up to $600 million through the first quarter of 2013, plus any incremental buybacks related to any after-tax gains from the Vantiv Inc. ( VNTV - Snapshot Report ) sale.

Our Viewpoint

In March this year, the Fed’s objection to a number of elements in Fifth Third's capital plan, including increases in its quarterly common dividend and the initiation of common share repurchases, had put the company on the back foot and considerably weakened its competitive position. Therefore, a positive development on that front is encouraging and this will inspire investors’ confidence in the stock.

Fifth Third currently retains its Zacks #2 Rank, which translates into a short-term Buy rating. However, considering its fundamentals, we have a long term Neutral recommendation on the stock.