Many bank stocks have recently filed capital plans with their regulators seeking increased shareholder payouts. In this article, I will discuss why some bank stocks such as Wells Fargo & Co (NYSE:WFC) should be held, given the potential for increased dividends and dividend yields in both the short- and long-term.
Should the capital plans be approved, a significant dividend increase could be seen at several banking institutions. This has a similar feel to 2007 when banks such as Wachovia, National City, Bank of America Corp (NYSE:BAC), and Citibank, which were overcapitalized at the time, made similar requests.
In 2013, Wells Fargo & Co (NYSE:WFC) raised its quarterly dividend by 14%, and the institution is waiting for Fed approval to raise it even more. In January the firm’s dividend increased by $0.03 to $0.25 cents per share, per quarter. This equates to approximately a 3% dividend yield.
It is anticipated that approval will come at some time before the end of the first quarter 2013. Once approved, Wells Fargo – as well as other banks – will be able to raise dividends and/or buy back shares for the period that runs between the second quarter of 2013 through the first quarter of 2014.
Currently, Wells Fargo & Co (NYSE:WFC) has over 5 billion shares outstanding, and it has emerged as one of the healthiest banks in the United States since the 2008 financial crisis. Between June 1, 2009 and June 1, 2011, Wells Fargo & Co (NYSE:WFC) was forced to cut its dividend to 5 cents per share per quarter. Then, in June 2011, Wells was able to begin raising the dividend back up to 12 cents per share, subsequently leading to its current 25-cent quarterly payout.
Over the past few years, Wells Fargo & Co (NYSE:WFC) has also increased its return on average assets, from 0.44% in 2008 to 1.41% at the end of 2012. In addition, Wells’ P/E ratio of 10.50 is lower than that of entities such as Bank of America Corp (NYSE: BAC) at 48.33, although Wells is considered to be a much less risky play than Bank of America for investors. Shares of Wells Fargo & Co (NYSE:WFC) are estimated to rise by more than 13% over the next 12 months.
Another of the banks to begin restoring healthier dividend payouts since the financial crisis is JPMorgan Chase & Co. (NYSE:JPM) . Between April 30, 2009 and April 30, 2011, JPMorgan Chase & Co. (NYSE:JPM) was forced to cut its then-dividend by 5 cents per share per quarter. As of the second quarter 2011, the bank was back up to paying out a quarterly dividend of $0.25 per share. This comes after a roughly $6 billion loss in the first three quarters of 2012 – the largest trading loss in JPMorgan Chase & Co. (NYSE:JPM)’s history.
U.S. Bancorp (NYSE: USB) is another banking institution that seems to be in more positive territory than in the past few years. The bank’s revenue growth has outpaced the overall banking industry average of 0.7%, and over the past year, its revenues are up by 2.5%.
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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