Wells Fargo & Co (WFC), JPMorgan Chase & Co. (JPM): Will Banks Be Increasing Dividends in the Near Future?

In addition, the bank’s gross profit margin is very high, coming in at 83.50%. And, its net profit margin of nearly 26% is also above that of the overall banking industry average. U.S. Bancorp currently pays a dividend of 0.78, which equates to a dividend yield of 2.84%.

Other banks that are still working on building back their capital include Citigroup Inc. (NYSE:C) and Bank of America. These institutions are each still paying out a penny per share, per quarter as they continue with their plans to rebuild capital, as well as more reliable profits. Both are trading at substantial discounts to book value.

Recently, Bank of America’s shares were trading in the range of nine times its 2014 estimate earnings of $1.29. Citigroup is in a similar situation and is presently trading at 8.1 times its $5.18 EPS estimate. These numbers, too, are likely due in large part to these institutions’ overall weak earnings of the recent past. After its share price plummeted by 44% in 2011, though, Citigroup’s stock price rose 51% in 2012.

Bank of America’s shares doubled throughout 2012. One reason for this could be the rapid rise in the yield on the 10-year U.S. Treasuries. It is estimated that the Fed plans to keep the short-term interest rates at record lows – at least until the rate of unemployment improves to 6.5%. Both Citi and Bank of America are currently trading at big discounts to book value.

One caveat to be mindful of is if QE3 comes to an end sooner than was previously thought. If this happens, there could be a wide range of effects on the entire banking sector.

The Bottom Line

Over the past few years, a number of banks have rebuilt their capital positions from the levels seen during the economic recession. This was largely a result of improved earnings from reduced credit costs. Many banks’ lackluster returns on equity – along with their limited investment opportunities and recession-related shareholder payouts – have increased the call for the return of these institutions’ excess capital in order to help boost return on equity.

With Wells Fargo’s record 2012 profit and its net income rising 19% to nearly $19 billion, this bank could prove to be a great holding in terms of both growth and income in the coming years.

Given the bank stock rally, now is a good time for investors to choose quality over recovery potential, as some of the major banking players have noted a strong recovery of their earnings and are trading at low premiums.

The article Will Banks Be Increasing Dividends in the Near Future? originally appeared on Fool.com and is written by Jordo Bivona.

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