In part one of this year’s stress test, the Dodd-Frank Stress Test (DFAST), Fifth Third again exceeded the standard, with its Tier 1 common capital ratio only declining 1% after the Fed’s tested “doomsday” scenario. While this result was pleasant news for Fifth Third investors, most were waiting for the release of the Comprehensive Capital Analysis and Review (CCAR) results, which would hopefully shed some light on the bank’s ability to return capital to investors.
On Thursday afternoon, the Fed released the results, and Fifth Third Bancorp (NASDAQ:FITB) investors should remain pleased:
Source: Comprehensive Capital Analysis and Review 2013: Assessment Framework and Results.
Just another 1% is all
With the CCAR, a bank submits a plan to the Fed requesting a larger return to shareholders in the form of a larger dividend or share repurchases. Fifth Third Bancorp (NASDAQ:FITB) remained well above the minimum Tier 1 common capital ratio of 5% required to pass the test, proving that it can remain well-capitalized even it boosts its shareholders’ returns.
What was the plan?
As I noted earlier this week, Fifth Third Bancorp (NASDAQ:FITB) is already fairly close to the Fed’s 30% payout ratio “ceiling,” so there may not be that much room to increase its dividend. Nevertheless, the bank has requested a higher dividend, though the actual amount will be decided at a meeting of its board of directors in June. Nevertheless, most analysts expect the bank to raise its dividend by at least 20%, which would boost its annual dividend to $0.48 per share.
Source: Analyst projections; *Actual amount will be known after quarterly board meeting in June.
With projected earnings of $1.64 per share for 2013, this projected dividend increase would push the bank’s payout ratio to 29%, right at the Fed’s implied maximum. Investors will enjoy a dividend yield near 3% from a bank like Fifth Third Bancorp (NASDAQ:FITB), but the bank is
planning on returning even more capital to shareholders in the form of share repurchases:
Source: Fifth Third Press Release.
Of this $1.7 billion, $750 million would be from the potential repurchase of trust preferred securities, which would be replaced by a similar amount of new debt. Another $984 million is part of a new authorization to repurchase common shares, which could potentially reduce the outstanding share count by over 50 million shares. This would result in common shareholders receiving a larger portion of per share earnings.
The article Fifth Third Bancorp Investors Could See a Higher Dividend originally appeared on Fool.com and is written by Robert Eberhard.
Fool contributor Robert Eberhard has no position in any stocks mentioned. The Motley Fool owns shares of Fifth Third Bancorp.
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