4/16/2013 8:00 PM ET|
It's time for the big bank payback
We rescued some of the nation's largest banks, and soon they will return big money to shareholders in the form of stock buybacks and dividend hikes. Here are six stocks to own in your 'payback portfolio.'
As bank earnings continue to roll out over the next few weeks, the headlines will focus on earnings. But I'll be looking more at improvement in banks' financial strength, for a simple reason.
We bailed out the banks five years ago. Now that they're getting better, it's payback time. And I want to be invested in the banks that'll be paying us back the most.
Those will be the ones with financial strength that keeps improving -- with room for further gains.
The banks, of course, long ago returned the bailout money, with interest. So when I say "payback time," I'm talking about all the loot they'll be handing over to shareholders now that they're getting stronger -- thanks to our bailouts.
That money will be arriving in the form of markedly higher dividends and stock buybacks. Either way, shareholders will benefit handsomely.
Here's my payback six-pack -- a short list of six banks for a "payback portfolio." These banks may be returning the most money to shareholders over the next three to five years. I put this list together with help from several mutual fund managers who are making the same bet.
The big 3
The three biggest banks that got the most taxpayer support should be the core of any payback portfolio. This means Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM). As taxpayers, we basically saved the first two. So, why not own their stocks now for payback?
JPMorgan Chase might have survived without help, since it was more cautious going into the credit meltdown. But the bailouts did help. So did a government-endorsed takeover of troubled Washington Mutual, which gave JPMorgan a whole new branch network at a good price.
Going forward, paybacks to shareholders -- plus improving business as the economy strengthens -- will put more money into the accounts of shareholders of these three and drive their stocks a lot higher.
"We think the large banks are in the third inning of a valuation re-rating," says Kevin Holt, a value manager in charge of the Invesco Comstock (ACSTX) fund, which started adding the banks ahead of last year's big move up.
"The real exciting thing about these banks is that there's a lot of excess capital that will be used for buybacks or dividends over the next five years," Holt says.
Holt, who manages $18 billion, is worth listening to; his fund beat competitors by 2 percentage points a year, annualized, over the past five years, according to Morningstar.
3 smaller banks
As for the smaller banks, the pickings aren't as easy, since many of these banks are much further along the road to recovery. This means there's less room for dividend hikes and share buybacks. It also means their stocks aren't as cheap.
These are three favorites of Anton Schutz, manager of the Burnham Financial Industries (BURFX) fund, which beat competing funds by 5 percentage points a year, annualized, over the past five years, according to Morningstar.
Some challenges, but don't worry
Sure, these banks face some big challenges. Low interest rates mean skimpier profits on loans. And loan growth is not exactly robust, at about 4% in the first quarter.
But the banks have been trimming costs and improving their financial strength -- and that leaves room to start giving back a lot more money to shareholders. Citigroup, Bank of America and JPMorgan Chase alone will return $55 billion to $80 billion over the next three years, says Patrick Kaser, a value manager at Brandywine Global Investment Management.
Let's deal with another issue: Does it make sense to buy the banks after they outperformed the market by so much last year? This should not scare you away, either, for at least two reasons.
For starters, 2012 was the first year the banks outperformed after four years of lagging the market. And once a group outperforms after such a weak stretch, it usually doesn't stop at one year, says Kaser.
Next, many of the banks still look cheap, despite the outperformance. All six of my payback portfolio banks trade below book value, which you can think of as the theoretical liquidation value of these banks. Plus they have price-earnings ratios, using next year's earnings, well below 10.
Investors looking for income should be happy with banks, as they continue to raise dividends. But don't be surprised if a lot of the capital return comes in the form of share buybacks, since this is the method preferred by the Fed, says Credit Suisse analyst Moshe Orenbuch. The Fed likes buybacks because they provide more flexibility. Banks can dial them back, if need be, without spooking investors too much. In contrast, dividend cuts can hurt stocks.
For shareholders, buybacks aren't a bad thing, since they boost per-share earnings by trimming the number of shares outstanding, thereby supporting share prices. They're especially beneficial when stocks trade below book value, since it means the banks are getting more than they pay for -- a lot more bang for their buck, in other words.
Now let's look more closely at my payback six-pack.
VIDEO ON MSN MONEY
Bonnie and Clyde are running the banks' board rooms.
The best way to rob a bank is to own one.
The bank robbers are running the banks right now.
We have never stopped bailing out the big banks and financial institutions. TARP was nothing compared to the subsidies they continue to get through the Fed’s Zero Interest Rate Policies (ZIRP), MBS purchases, etc. By design, it’s less obvious to most Americans how the banks benefit from these programs than TARP. It’s more like a shiv to the kidney than a slap in the face.
But you’re right. The banks will continue to get stronger (I think a monkey could figure out how to make money lending money they get for free). The Fed will make sure the subsidies go on as long as it takes for the banks to be thriving again. But, it will be at the expense of savers and the taxpayers, so, you might want to think about buying a 3x leveraged bank ETF as a hedge, just to break even.
That picture of a vault guard doesn't scare me. Just another sleepy fatty.
Just another made-up story by MSN.
“”””Why don't people stop doing business with these banks???””””
I was surprised when years ago I made a large withdraw from my local credit union - and found out that they actually maintain an account at the BofA down the street. I had to take my credit union WITHDRAW check down the street to the BofA to get MY cash!
so it becomes pretty hard to NOT deal with the big 3 banks
Guess not enough suckers buying their stock so they are trying to drum up business.
I don't invest in Banks, Insurance Companies and Airlines !
Is everyone here stupid??? Why would you want to start purchasing stocks in a bank that has to lose money??? This article caters to the large masses of ignorant folks who have no financial education. (If you posted something on here, then yes that means I'm talking to you). The writer also has no idea in how the system works.
Let's put this in perspective people. You DON'T buy a stock that is about to lose large capital because of debt. it's value is dropping because of the payback, not increasing.
At the very least, this article and everyone's comments explains to me why so many are poor and in debt. It's a complete lack of education.
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