Fifth Third to Buyback Shares

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

The deal was made public through a filing with the Securities and Exchange Commission late last week. As per the agreement terms, Fifth Third will pay $100 million to Credit Suisse on December 19, 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 take place on or before March 14, 2013.

The Back Story

Earlier this year, though a number of Wall Street big shots like U.S. Bancorp (USB - Analyst Report) and Wells Fargo & Co. (WFC - Analyst Report) passed the stress test 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 they had to resubmit it.

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’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.

Fifth Third had already bought back approximately 23 million shares for $350 million by October. Further, in November, the company entered into an accelerated share repurchase transaction with a counterparty pursuant to which it agreed to purchase approximately $125 million of its outstanding common stock.

As a matter of fact, earlier this month, Fifth Third Bancorp announced that it is likely to recognize a pre-tax gain of approximately $140 million (around $91 million after-tax) in the fourth quarter of 2012 from the sale of its 15% stake in Vantiv Inc. The company intends to use the proceeds for buying back its own common shares.

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 is expected to 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.

We believe that Fifth Third’s current capital plan is encouraging and its effort to reward its shareholders will be applauded by the investors. However, we do not expect any notable revisions in estimates following this news as they already incorporate the impact of the company’s current share buyback program.