Now's the time to seek out bank dividends
The financial sector has performed very well, and some firms are increasing share buybacks while others are opting for a more shareholder-friendly solution.
But I'd like to dive a little deeper and look at how banks that have been told by the Fed that they can pay out more on dividends or increase their share buyback programs have chosen to divide those payout streams. That's because I think investors get a lot more reward from a dividend increase than they do from a buyback. It makes sense, to my way of thinking, to go with the banks that emphasize dividends over buybacks -- all else being equal, of course.
The market's initial reaction to those banks such as Bank of America (BAC) that have received the Fed's stamp of approval on their capital plan for stock buybacks and/or dividend increases was to push their share prices higher Friday. Bank of America shares, for example, closed up 3.8%.
Banks that got a thumbs down from the Fed and will have to resubmit their plans closed down. BB&T (BBT), for example, finished off 2.36%. (It's hard to say that JPMorgan Chase (JPM) was down Friday because the Fed told the bank to improve its capital plan. The bank and CEO Jamie Dimon took heavy fire Thursday from a Senate report that ripped the bank's culture and risk controls in the London Whale trading debacle. JPMorgan Chase shares closed down 1.92% Friday.)
But the banks that got approval to increase their buybacks or dividends have put together very different mixes.
Some banks chose to increase their share buyback programs but not their dividends. Citigroup (C), for example, announced a new $1.2 billion program of share purchases but kept its dividend at a penny a share. That's not exactly a rousing vote of confidence by the bank's management in the bank's cash flow going forward. It's hard -- and very visible -- to cut a dividend once announced. It's much easier to announce a big buyback program and then to execute only a part of it if times turn tough. Bank of America was another bank announcing a big buyback -- $5 billion -- without a dividend increase.
Most of the banks that got the Fed's approval chose a mix of dividends and buybacks. Banks that wanted to send a message of confidence to shareholders seem to have picked an increase in the neighborhood to 20%. Wells Fargo (WFC) raised its dividend by 20%. U.S. Bancorp (USB) upped its dividend by 18%. Both banks also announced buybacks. (US Bancorp is a member of my Jubak's Picks portfolio.)
A very few banks went for all dividends. Capital One (COF) is the standout here. The bank announced a 500% increase to 30 cents from 5 cents.
The financial sector has been a clear leader in the rally to all time highs in the U.S. stock market. Right now I'd be looking at bank stocks where management is demonstrating a commitment to taking care of shareholders with higher dividend payouts.
I wouldn`t buy a bank stock if you paid me.These crooked bankers should be strung
up and face a firing squad.
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