Wednesday, March 10, 2010
Federal regulators are apparently telling the major US banks not to hike dividends or start share buyback programs anytime soon. The regulators want the banks to keep their capital ratios high because of the continuing loan losses the banks are experiencing. That might mean that the government's interference may push dividend hikes into next year. Having said this, I believe the banks are under increasing pressure from long-time, income oriented share holders to start hiking their dividends. The banks also know that most of these shareholders will begin to sell if dividend hikes are not forthcoming soon. In light of these two opposing forces, we think banks will start talking more and more about dividend actions they plan to make, when they get the "green light" from the regulators. Some US banks may do as corporations often do in Europe by giving guidance about dividend hikes six months to a year in the future. Because I believe dividend hikes from banks will ultimately come, I am offering my thoughts about the current dividend-paying ability of the largest banks. I have studied the most recent financial statements of the five largest banks in the United States; the following are my predictions of the order and time frame in which they will begin to raise their dividends. 1. JP Morgan -- JPM is my number one pick to hike their dividend in 2010, unless they are prohibited from doing so by the regulators. JPM's total loan loss reserves appear to have peaked and their existing loan reserves are far in excess of their recent loan loss experience. 2. Wells Fargo -- WFC's loan losses also appear to have peaked and management has voiced a desire to raise the dividend. The only problem is WFC's balance sheet. It is a little light in excess capital. Still I believe the company is anxious to reward its shareholders. Thus, I would not be surprised if some token dividend hike was initiated as soon as the regulators approve it. 3. US Bancorp -- The company would probably raise their dividend today if the government would permit it. They have the reserves and the will to hike dividends as soon as possible. 4. Bank of America -- BAC's massive capital build in 2009 nearly doubled the number of their outstanding shares. I believe BAC's first order of business will be to initiate share buy-backs to begin the process of reducing their shares outstanding. Even if they were allowed to, I do not predict they would hike their dividend in 2010. A dividend hike of some modest amount should be forthcoming in late 2011. 5. Citigroup -- I just do not see a dividend hike for C anytime soon. Like BAC, they also issued massive numbers of new shares in 2009. Thus, I think C will concentrate on share buybacks for the foreseeable future. The banks are not clear of loan loss problems, but the losses appear to be slowing and profits from their investment banking operations should produce positive earnings in all of the major banks for 2010. Interestingly, if the banks do start talking more definitively about future dividend hikes, their stocks would likely rise. On the contrary, if banks clam up about future dividend hikes, their stocks are likely to continue to be range bound.