Since the 2008-09 financial crisis, Federal regulators have required banks to submit annual plans requesting permission to reinstate (or increase) dividends and share buybacks. The plans are evaluated by the regulators, viewed through the prism of financial strength and stability.
The following slide, taken from the Wells Fargo & Co (NYSE:WFC) analyst presentation referenced earlier, outlines Wells’ management total return of capital expectations. A 40% EPS payout ratio target was communicated as part of the commentary.
Federal regulators approved Wells Fargo’s June 1, 2013 dividend, raised to from $0.25 to $0.30 a share. This represented a 30% payout ratio based upon 2013 2Q earnings per share.
Therefore, by deduction, shareholders should expect an uplift in the dividend in order to simply reach the payout goal of 4%, without consideration of future EPS growth. However, Wall Street expects Wells Fargo’s five-year EPS growth rate to be between 7% and 9%.
Assuming a two-year, 7% EPS growth rate, and a 40% dividend payout ratio, the 2015 dividend would be $1.76 per share. Based upon the stock’s recent close, that’s a roughly 4% yield on shares bought today.
Furthermore, Wells Fargo & Co (NYSE:WFC) management has not missed a quarterly Wall Street earnings expectation over the past four years. Zero.
Now then, a slide from U.S. Bancorp’s 2013 second-quarter earnings conference call clearly offers that company’s policy:
U.S. Bancorp received Federal approval to raise their June 26 dividend from $0.195 to $0.23 a share, or an 18% bump. That translated into a 30% quarterly payout ratio, or the low end of management’s guidance.
Assuming a mid-point target payout ratio of 35%, and a two-year, 7% compound earnings growth rate, the 2015 annual cash payment to shareholders may be projected to be $1.13 on diluted earnings of $3.23. That’s a roughly 3% yield based upon recent prices.
Wall Street analysts currently project U.S. Bancorp (NYSE:USB)’s earnings to grow between 6.5% and 8% per year over the next five years.
Similar to Wells Fargo & Co (NYSE:WFC), U.S. Bancorp has not missed a quarterly Wall Street earnings expectation in at least four years.
Foolish bottom line
A sustainable U.S. economic recovery requires participation from the banking industry. Investors seeking strong, solvent financial institutions with a clear, understandable plan to create shareholder value may find that Wells Fargo and U.S. Bancorp (NYSE:USB) fit the ticket.
The article 2 Premier Long-Term Banking Stocks for Your Portfolio originally appeared on Fool.com.
Raymond Merola owns shares of Wells Fargo and U.S. Bancorp. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo.
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