Banking & Finance

The Return of the Bank Dividend (JPM, BAC, WFC, MS, FAS)

Money is short and times are hard, but the government is paid back and bank investors may find dividend checks in with their holiday cards. The Wall Street Journal broke news late in afternoon trading that The Federal Reserve is expected to allow healthy banks to resume paying their higher dividends again.  While banks have a mixed history in how large the dividends will be compared to history, this is the news that many bank stock investors have hoped for and waiting for.

Jamie Dimon of J.P. Morgan Chase & Co. (NYSE: JPM) is expected by 24/7 Wall Street to be among the first to return to higher payouts.  He has said on many occasions that he did not even want TARP money, and he wants to pay dividends as soon as soon as the hold is released.  Its current dividend is only $0.05 per quarter and that generates a yield of right at 0.5%.  Its dividend used to be $0.38 per quarter, although it is not assured that Dimon will immediately return to that level.  Thomson Reuters has estimates of $4.62 EPS in 2011.

Bank of America Corporation (NYSE: BAC) is the largest of the banks by deposits, and it has signaled that it will return to the dividend paying at a lower-income payout ratio than its historic level.  The bank’s common stock now only pays $0.01 per quarter for a 0.3% yield, down from a high of $0.64 before the problems hit.  BofA shares closed up 5.3% at $12.13 today.

Wells Fargo & Company (NYSE: WFC) will also likely return to dividend payments, after all it is Warren Buffett’s favorite bank.  The current dividend is only $0.05 per quarter for a yield of 0.80%, down from a peak of $0.34 per quarter before the meltdown.  Shares closed up 3.8% at $27.46 on the day.

Morgan Stanley (NYSE: MS) is one of the great bank holding companies that has no real bank.  Its old $0.27 dividend from before the meltdown was cut to $0.05 per quarter for a 0.8% yield.  Its shares closed up 3.8% at $26.37.

If you don’t believe that the sector will win greatly from this, look no further than the triple-leverage ETF of Direxion Daily Financial Bull 3X Shares (NYSE: FAS).  Its shares were up all day, but the ETF rallied nearly another $1.00 late in the trading day to close up $2.10 or 9.15% at $25.08.

The good news is that dividends will return.  Some in rapid form.  Some will be lower payouts than historic payout ratios.   Investors need to be aware of one thing, and that is that these banking giants are no longer likely to need capital for big acquisitions.  Imagine explaining to the public if you were a deeply troubled bank that you now wanted to grow by making a large acquisition.  That does not mean all the cash will get distributed though.

Basel II and the new Volcker Rule will require these banks to be far better capitalized than before.  Much of the return to earnings will have to be held in reserves for higher capital ratings.

Many of the current dividends in the banking sector will likely be raised by what seems like an exponential basis.  These new nominal dividend payments will likely be lower payouts in many cases than during the pre-meltdown days.  Still, the gains these banks saw at the end of the day are tell-tale signs that investors will be fired up if they can start getting those dividend checks again.  It isn’t like they are getting big interest payments from Treasuries now.

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JON C. OGG