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Big Banks to Reward Investors With Dividend Hikes & Buybacks
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The waiting time for bank investors is over. Big banks have come out with capital plans to reward shareholders with billions of dollars in the form of dividends and share repurchases over the next four quarters.
Last week, the Federal Reserve gave green signal to banks’ plans following annual stress tests, after a year’s hiccup. The central bank had placed additional restrictions on banks’ dividend hikes and buybacks owing to the uncertainty over the impact of the coronavirus pandemic.
While ending the restrictions, the Fed noted that banks remained “well capitalized” even under the severe economic downturn. All 23 participating banks would collectively incur $474 billion in losses. Also, banks’ common equity tier 1 ratio would decline to 10.6%, which is still more than twice the minimum requirement of 4.5%.
This underscores the fact that big banks are capable of withstanding micro/macro-economic shocks, remain handily above the regulatory capital requirements and return more capital to shareholders.
Morgan Stanley Doubles Dividend, Citi’s Plan Unchanged
One of the biggest surprises came from Morgan Stanley (MS - Free Report) as it announced plans to double its quarterly dividend to 70 cents per share, effective third-quarter 2021. The investment bank has also authorized buybacks of up to $12 billion through Jun 30, 2022.
James Gorman, Chairman and CEO, said, “Morgan Stanley has accumulated significant excess capital over the past several years and now has one of the largest capital buffers in the industry. The action taken by the Board reflects a decision to reset our capital base consistent with the needs we have for our transformed business model.” It must be kept in mind that the company closed two major deals – E*Trade Financial and Eaton Vance –between October 2020 and March 2021.
While there weren’t any banks that matched Morgan Stanley’s aggressive capital deployment stance, another major investment bank Goldman Sachs (GS - Free Report) intends to raise dividend by 60% to $2 per share. David Solomon, the company’s CEO, said, “We are encouraged by the progress in reducing the capital intensity of our business as reflected in the recent stress test results.”
Further, the largest U.S. bank, JPMorgan (JPM - Free Report) plans to hike dividend by 11% to $1 per share. The bank, however, “continues” with its previously announced repurchase authorization of $30 billion. Likewise, Bank of America (BAC - Free Report) kept the buyback plan at previously declared level of $25 billion. The company said that it “expect to increase the quarterly common stock dividend by 17 percent to $0.21 per share, beginning in the third quarter of 2021.”
Though Wells Fargo (WFC - Free Report) , which was one of the few banks that had to cut dividend last year due to restrictions, announced plans of a 100% dividend rise to 20 cents per share, this is nowhere near the 51 cents per share that it paid in pre-COVID-19 era. Nonetheless, the company authorized nearly $18 billion under buyback plan.
Now coming to Citigroup (C - Free Report) , the bank intends to keep the quarterly dividend unchanged at 51 cents per share and continue share repurchases. The key reason for this disappointing development is that the company’s stress capital buffer (SCB) requirement will increase this year to 3.0% from 2.5% at present. This has, thus, lowered its ability to boost capital return. On the other hand, Capital One saw its SCB requirement to fall to 2.5% from 5.6%. This will be effective Oct 1, 2021.
Other major banks that plan to boost their capital returns include PNC Financial (PNC - Free Report) , Truist Financial, State Street and BNY Mellon. These banks intend to offer quarterly dividend hikes in the range of 6-10% and also return billions of dollars through share repurchases.
Our Take
While 2020 was disappointing for bank investors, this year is turning out to be great. The KBW Nasdaq Bank Index has rallied almost 30% so far this year against a decline of 8% last year. As the economy gradually reopens, demand for loan is expected to rise. Further, steepening of the yield curve, which along with rising loan demand, is expected to support banks’ net interest income and margin.
Also, banks are undertaking business streamlining/expansion initiatives. These efforts are likely to provide support to banks’ fee income sources. Therefore, we believe that 2021 will turn out to be a good year for bank investors.
+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities
In addition to the stocks you read about above, would you like to see Zacks’ top picks to capitalize on the Internet of Things (IoT)? It is one of the fastest-growing technologies in history, with an estimated 77 billion devices to be connected by 2025. That works out to 127 new devices per second.
Zacks has released a special report to help you capitalize on the Internet of Things’s exponential growth. It reveals 4 under-the-radar stocks that could be some of the most profitable holdings in your portfolio in 2021 and beyond.
Image: Bigstock
Big Banks to Reward Investors With Dividend Hikes & Buybacks
The waiting time for bank investors is over. Big banks have come out with capital plans to reward shareholders with billions of dollars in the form of dividends and share repurchases over the next four quarters.
Last week, the Federal Reserve gave green signal to banks’ plans following annual stress tests, after a year’s hiccup. The central bank had placed additional restrictions on banks’ dividend hikes and buybacks owing to the uncertainty over the impact of the coronavirus pandemic.
While ending the restrictions, the Fed noted that banks remained “well capitalized” even under the severe economic downturn. All 23 participating banks would collectively incur $474 billion in losses. Also, banks’ common equity tier 1 ratio would decline to 10.6%, which is still more than twice the minimum requirement of 4.5%.
This underscores the fact that big banks are capable of withstanding micro/macro-economic shocks, remain handily above the regulatory capital requirements and return more capital to shareholders.
Morgan Stanley Doubles Dividend, Citi’s Plan Unchanged
One of the biggest surprises came from Morgan Stanley (MS - Free Report) as it announced plans to double its quarterly dividend to 70 cents per share, effective third-quarter 2021. The investment bank has also authorized buybacks of up to $12 billion through Jun 30, 2022.
James Gorman, Chairman and CEO, said, “Morgan Stanley has accumulated significant excess capital over the past several years and now has one of the largest capital buffers in the industry. The action taken by the Board reflects a decision to reset our capital base consistent with the needs we have for our transformed business model.” It must be kept in mind that the company closed two major deals – E*Trade Financial and Eaton Vance –between October 2020 and March 2021.
While there weren’t any banks that matched Morgan Stanley’s aggressive capital deployment stance, another major investment bank Goldman Sachs (GS - Free Report) intends to raise dividend by 60% to $2 per share. David Solomon, the company’s CEO, said, “We are encouraged by the progress in reducing the capital intensity of our business as reflected in the recent stress test results.”
Further, the largest U.S. bank, JPMorgan (JPM - Free Report) plans to hike dividend by 11% to $1 per share. The bank, however, “continues” with its previously announced repurchase authorization of $30 billion. Likewise, Bank of America (BAC - Free Report) kept the buyback plan at previously declared level of $25 billion. The company said that it “expect to increase the quarterly common stock dividend by 17 percent to $0.21 per share, beginning in the third quarter of 2021.”
Though Wells Fargo (WFC - Free Report) , which was one of the few banks that had to cut dividend last year due to restrictions, announced plans of a 100% dividend rise to 20 cents per share, this is nowhere near the 51 cents per share that it paid in pre-COVID-19 era. Nonetheless, the company authorized nearly $18 billion under buyback plan.
Now coming to Citigroup (C - Free Report) , the bank intends to keep the quarterly dividend unchanged at 51 cents per share and continue share repurchases. The key reason for this disappointing development is that the company’s stress capital buffer (SCB) requirement will increase this year to 3.0% from 2.5% at present. This has, thus, lowered its ability to boost capital return. On the other hand, Capital One saw its SCB requirement to fall to 2.5% from 5.6%. This will be effective Oct 1, 2021.
Other major banks that plan to boost their capital returns include PNC Financial (PNC - Free Report) , Truist Financial, State Street and BNY Mellon. These banks intend to offer quarterly dividend hikes in the range of 6-10% and also return billions of dollars through share repurchases.
Our Take
While 2020 was disappointing for bank investors, this year is turning out to be great. The KBW Nasdaq Bank Index has rallied almost 30% so far this year against a decline of 8% last year. As the economy gradually reopens, demand for loan is expected to rise. Further, steepening of the yield curve, which along with rising loan demand, is expected to support banks’ net interest income and margin.
Also, banks are undertaking business streamlining/expansion initiatives. These efforts are likely to provide support to banks’ fee income sources. Therefore, we believe that 2021 will turn out to be a good year for bank investors.
+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities
In addition to the stocks you read about above, would you like to see Zacks’ top picks to capitalize on the Internet of Things (IoT)? It is one of the fastest-growing technologies in history, with an estimated 77 billion devices to be connected by 2025. That works out to 127 new devices per second.
Zacks has released a special report to help you capitalize on the Internet of Things’s exponential growth. It reveals 4 under-the-radar stocks that could be some of the most profitable holdings in your portfolio in 2021 and beyond.
Click here to download this report FREE >>