Fifth Third to Repurchase Shares

Fifth Third Bancorp ( FITB - Analyst Report ) has recently inked a deal to buy back about $125 million of its outstanding common stock. The share repurchase deal reached with Credit Suisse International, a division of Credit Suisse Group ( CS - Snapshot Report ) , is part of its capital plan that got the Federal Reserve’s nod in August this year and encompasses the repurchase of 100 million shares.

As per the agreement terms, Fifth Third will pay $125 million to Credit Suisse on November 9, 2012 and anticipates to receive a significant number of shares then. However, the final settlement for the actual number of shares that Fifth Third would receive is likely to occur on or before February 7, 2013.

The Back Story

As a matter of fact, though a number of Wall Street giants 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.

However, ushering in good news for the shareholders of Fifth Third, its revised capital plan through March 2013 received the Fed’s approval in August, which included a possible increase in its dividend in the third quarter as well as share buybacks. The approval justified the company’s capital strength.

Following this, the Board of Directors of Fifth Third approved a new share buyback authorization of 100 million shares. This replaced the previous authorization from 2007 that had 14 million shares remaining. The company had already bought back approximately 23 million shares for $350 million by October.

In addition to the positive development on the share buyback front, in September, Fifth Third also announced a 25% hike in its third quarter dividend on its common shares that increased to 10 cents per share from 8 cents paid earlier. The enhanced dividend was paid in October.

Our Take

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 weakened its competitive position to some extent. Therefore, a positive development on that front is encouraging and this will inspire investors’ confidence in the stock.

Fifth Third currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we have a long-term Neutral recommendation on the stock.