After the financial crisis, regulators kept banks on a short leash in terms of returning capital to shareholders via dividends and share repurchases.
But that grip has loosened as the health of these banks has improved, along with their capital levels. The benefits of the tax bill, which lowers the U.S. corporate rate from 35% to 21%, should help too. All of this has improved the dividend prospects for this group, which should look good for the next few years, barring a significant downturn or recession.
Vivek Juneja and Jonathan Summitt, who cover large banks for JPMorgan Chase (JPM), are bullish, forecasting a 38% increase in dividends this calendar year and 26% in 2019. They expect dividend payout ratios to reach 35% to 40% for the regional banks they cover, and 30% for large money-center banks.
"With rising earnings, partly driven by a lower tax rate, we expect dividends to increase strongly" this year and in 2019, they note. Capital levels remain strong, they add, although they should decline due to capital returns and loan growth. But the banks, under regulatory pressure since the financial crisis, have built up a lot of capital, and they should have more leeway to tap some of that.
The accompanying table includes these analysts' forecasts for dividend increases and payout ratios. The targets for many of the banks are above the consensus, though not always by much. These banks yield an average of 2.1%, above the Standard & Poor's 500's (.SPX) average of 2%, and yields have the potential to get bigger.
Marty Mosby of Vining Sparks isn't as aggressive as the JPMorgan team, but he still expects large-cap banks to grow dividends by 25% this year and some 20% next year. Mosby's estimates line up with the Federal Reserve's Capital Analysis and Review, or CCAR, process, which covers bank operations from July 1 to June 30. He's expecting large banks to raise their payouts by 25% on average in the CCAR cycle that starts July 1, helped by what Mosby forecasts will be 40% earnings growth.
He says that until recently, regulators limited banks to payout ratios of no more than 30%. But that's changing.
Last year BB&T (BBT), a large North Carolina–based regional bank, paid a dividend of $1.26 a share on earnings of $2.74 for a payout ratio of 46%. Some banks had payout ratios above 30% in 2017, including SunTrust Banks' (STI) 32% and Northern Trust's (NTRS) 33%.
Mosby notes that in the 2017 CCAR process, which requires banks to outline their capital plans for regulatory approval, banks received "the strongest increase in capital deployment since the financial crisis." The median dividend rose by 26%, he says, and the banks increased share-buyback approvals by 44%. The latter form of capital return had the added benefit of reducing large-cap bank share count by 5% over the last two years, Mosby says.
The JPMorgan analysts expect Bank of America (BAC) to raise its dividend this year by nearly 60%, to 62 cents, from 39 cents in 2017. It could increase to 88 cents next year, one of the biggest payout hikes among the 10 companies in the table.
If the earnings forecasts for the bank are on the mark, BofA shouldn't have any problem notching such a big dividend hike. They are forecasting that the bank will earn $2.45 this year, versus $1.59 last year on a reported basis. And they see profits climbing to $2.76 a share in 2019.
JPMorgan's Juneja says BofA will benefit from "expense savings, potential for increased capital return, and higher interest-rate sensitivity" than other banks.
Another bank expected to have a big dividend hike this year is Citizens Financial Group (CFG). Headquartered in Providence, R.I., the regional bank has been improving its returns and profitability. Its return on equity was 6.5% last year, up from 5.1% in 2016, and JPMorgan forecasts it will climb to 8.1% this year.
The consensus analyst dividend estimate is 96 cents a share this year, up 50% from 2017, and $1.17 next year — a little lower than the $1 and $1.24 JPMorgan is forecasting. Juneja cites the bank's "potential to further boost its performance, including profitability and operating efficiency."
One measure of the company's improving profitability is its efficiency ratio, which measures noninterest expenses as a percentage of total revenue. It was 60.2% last year, compared with 63.1% in 2016.
Wells Fargo (WFC) is expected to have one of the slowest-growing dividends of its peers. Analysts expect the bank, which has been hit by a scandal involving the creation of thousands of bogus customer accounts, among other things, to pay $1.65 a share this year, up 7%. That's hardly shabby, but it's a lot lower than what's expected for a large U.S. bank.
Juneja cites increased expenses from the bank's "various scandals" and slower revenue growth.