Looking for Big Dividends & Buybacks After Stress Tests (JPM, WFC, C, BAC, BK, STT, GS, MS)

The next wave of stress tests on the U.S banks is due to come out by the end of this week.  The Federal Reserve is expected to show that bank balance sheets have improved, and regulators are likely to allow big dividend hikes and buybacks to return to somewhat normalized levels.  Deciding how much these big banks can really raise their dividends is one issue, but more important is that the banks may still remain conservative in their payouts. Doubling or tripling dividends might be possible, but most managers do not want any public backlash and they may opt to just do nominal dividend hikes along with larger share buybacks.

J.P. Morgan Chase & Co. (NYSE: JPM) is likely to be the first of the too big to fail banks to raise its shareholder payouts.  JPMorgan might not double its dividend from the current $1.00 now (about 2.4% yield) to $2.00 (about 4.8%) on an annualized basis, but Thomson Reuters has estimates of $4.70 EPS in 2012.  A 40% payout ratio would take the dividend to about $1.88 on an annualized basis.  Expecting an 88% hike seems high, but that implies a 50% dividend hike is very doable and a large buyback will come.

Wells Fargo & Co. (NYSE: WFC) pays out $0.48 on an annualized basis today, and Thomson Reuters has estimates of $3.20 EPS for 2012.  A 40% payout ratio would generate $1.28 on an annualized basis or about 4.1%.  We do not expect that it will raise the payout that much, but it may use much of its excess liquidity to buy back stock selectively.

Bank of New York Mellon Corporation (NYSE: BK) and State Street Corporation (NYSE: STT) are both also expected to come out fine in the stress tests.  These banks could probably double their dividends based upon expected earnings of the trust banks, but we are not as sure that they will formally do that.  Bank of New York pays out $0.52 annualized today and yields 2.3%, and Thomson Reuters has estimates of $2.25 EPS for 2012; a 40% payout ratio would generate a $0.90 per year dividend and that yields close to 4%.

Bank of America Corporation (NYSE: BAC) and Citigroup, Inc. (NYSE: C) are both expected to try to increase their dividends and share buybacks.  Prince Alwaleed bin Talal has recently said he would demand Mr. Vikram hikes the payout soon.  Bank of America does not have a key holder making the same demands and it is still up for grabs as to just how much the bank will really have to allocate for mortgage losses and other settlements.  BofA could be a disappointment on the dividends and buybacks.  If it was just having to raise capital last year, regulators are likely to be less eager to allow Bank of America to start sending money out the backdoor to its shareholders.

Of the bulge bracket investment banks, remember that these are bank holding companies that really have no bank operations.  Goldman Sachs Group, Inc. (NYSE: GS) yields only about 1.2% today and Morgan Stanley (NYSE: MS) yields about 1.1% today.  Each are expected to be able to raise their dividends, but these banks are still more dependent upon the trends of financial market trading and investment banking than they are real loan and balance sheet performance of the traditional banks.

Starting on Monday we should be getting more of a focus on the stress tests.  This week has been dominated by Greece and a slowing story of China and Brazil.  More details and more predictions should start coming front and center on Monday.

JON C. OGG