The Fed barred the biggest banks from buying back stock in response to the pandemic last year.
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Banks have had an impressive run this year as the economy has improved, but investors will soon have more reason to get excited. Restrictions on share repurchases and dividends could be gone in less than a month
Last year, while the economy was reeling from the coronavirus pandemic, the Federal Reserve ordered the largest banks to halt buybacks and capped dividends based on recent profits. The aim was to force managements to conserve capital and put money to work lending to clients.
It turned out that most banks were well equipped to weather the crisis, so they could have returned capital to shareholders if not for the Fed’s stance, but investors steered clear anyway.
Sentiment changed in November as vaccines were rolled out and signs emerged that the economy was recovering, reducing the risk of loan losses for banks. Lenders got another boost after performing well on the second round of 2020 stress tests in December. The Fed said in March that it likely will ease restrictions for banks after this year’s stress tests.
The SPDR S&P Bank ETF (ticker: KBE) has gained 63% since November, outpacing the 29% jump in the S&P 500, as moves in interest rates have made lending more profitable.
Results of the 2021 tests are set to be released on June 24, so Barron’s ran a screen of 18 banks in the S&P 500 to see which may be most equipped to substantially boost their payouts. We looked at dividend payout ratios for 2019 and 2020, based on FactSet data. Before the pandemic, roughly 30% of capital payouts to shareholders were made as dividends and 70% were in the form of buybacks.
Analysts are optimistic about the industry’s performance in this year’s stress tests and the prospects for banks to pay capital back to shareholders. The total capital return for banks could hit $200 billion over the next four quarters, according to Barclay’s analyst Jason Goldberg. He expects that the total yield for the sector will be roughly 8.5% with 2.6% from dividends and 5.8% from buybacks.
“We expect our entire coverage to announce dividend increases for 3Q21, marking the first hikes in over a year, and forecast every bank repurchasing more shares over the next 12 months than the past 12 months,” Goldberg wrote in a recent note.
To be sure, the prospect of rising dividends is just one reason to hold bank stocks. Investors will also want to pay attention to other aspects of a bank’s expected performance relative to peers before making investment decisions.
That said, based solely on their comparatively low payout ratios in 2019 as well as in a challenging 2020, the following banks may have the most room to lift their dividends this year: Bank of America (ticker: BAC), Citigroup (C), Fifth Third (FITB), JPMorgan Chase (JPM), M&T Bank (MTB), and Zions Bancorporation (ZIONS).
Banks May Be Able to Raise Dividends Soon
Lenders with low recent payout ratios could be able to lift their dividends the most.
Source: Factset
Write to Carleton English at [email protected]
