Banking, finance, and taxes

5 Analyst Bank Stock Picks That Are Huge Share Buyback Winners

Lee Jackson

Published: June 30, 2017 10:00 am

Last Updated: January 12, 2020 10:32 am

If there is a set of data results that regulators and the Federal Reserve feel much better about, it’s the recent bank stress test results and the Comprehensive Capital Analysis and Review (CCAR), which was very positive for some of the top banks. The “too big to fail” argument has stayed in vogue and in the regulators’ lexicon since the meltdown in 2008 and 2009. That is with good reason: The banking system was breathtakingly close to failing, and everybody agrees we can’t let the situation deteriorate like that again.

In new Deutsche Bank research report, the analysts feel that some of the top banks are far bigger winners than others, but at the margin they feel that the results overall are very positive for the banking sector. They had three specific reasons why:

1. Both share buybacks and dividend increases beat expectations.
2. The results show that banks are more in control of managing their capital levels/deployment.
3. It supports the view that regulatory pressures are easing on the sector after years of stringent policy.

The analysts also noted this in their report:

While capital deployment levels came in higher than we expected, combined dividend and buyback yields are up just 2.3% versus last year. This may not be enough to offset future earnings pressures from the flattening yield curve, sluggish loan growth, and disappointing capital market revenues (assuming these trends continue).

There were some big winners in the group, and here we focus on the stocks rated Buy at Deutsche Bank.

BB&T

Deutsche Bank is very positive on this company, as it has fared very well. BB&T Corp. (NYSE: BBT) is a Winston-Salem, North Carolina-based financial services company with more than $180 billion in assets. With a history dating back to the Civil War, and now currently the ninth largest U.S. bank by deposits and sixth largest by number of branches, BBT offers a wide variety of different financial products ranging from consumer and commercial banking to securities brokerage and asset management.

The bank increased the dividend to $0.33 a share from $0.30, which came in above the Deutsche Bank estimates of $0.32. The company plans on buying back $1.8 billion in shares, beginning next quarter, and that was also above the estimates of $1.71 billion.

Shareholders receive a 2.65% dividend. The Deutsche Bank price target for the shares is $49, while the Wall Street consensus target is $47.27. Shares closed Thursday at $45.61.

Goldman Sachs

This continues to be the gold standard of Wall Street banks and trades at a reasonable 13 times estimated 2017 earnings. Goldman Sachs Group Inc. (NYSE: GS) has a gigantic institutional equity, debt and derivatives business, an ultra-high net worth clientele, top investment banking and capital markets expertise. The bank continues to be a dominant force around the world and is one of the most sought after in the world. And it is one of the very few that dictate who can be a client at the firm.

Deutsche Bank sees the dividend rising to $1.00 from $0.75. The report also noted this:

Capital plan also included share buybacks (not quantified) and the possible issuance and redemption of other capital securities. Note we had assumed $7 billion of repurchases but based on CCAR and DFAST results, estimated buybacks could be closer to $10 billion.

Goldman Sachs shareholders receive a 1.35% dividend. Deutsche Bank has a $255 price objective, and the consensus target price is $244.08. Shares closed Thursday at $224.41.

JPMorgan

This stock trades at a reasonable 13 times estimated 2017 forward earnings and could respond good in a rising rate scenario. JPMorgan Chase & Co. (NYSE: JPM) is one of the leading global financial services firms, and one of the largest banking institutions in the United States, with about $2.6 trillion in assets. The company as it is today formed through the merger of retail bank Chase Manhattan and investment bank JPMorgan.

The firm has many operating divisions, including investment and corporate banking, asset management, retail financial services, commercial banking, credit cards and financial transaction services.

The bank is raising the dividend to $0.56 from $0.50, which is ahead of Deutsche Bank’s $0.55 estimate. The firm also sees share buybacks of $19.4 billion of stock through 2018, versus their prior estimates of $13 billion.

JPMorgan investors receive a 2.2% dividend. The $90 Deutsche Bank price target is less than the consensus target of $94.10. And shares closed Thursday at $91.15.

Morgan Stanley

Morgan Stanley (NYSE: MS) posted outstanding first-quarter results, beating on the top and bottom lines, and it may be among the best buys in the banking and investment arena. It is another one of the white glove Wall Street firms that continues to show tremendous growth, and it is running neck and neck with Goldman Sachs as the bank of choice for high-profile initial public offerings.

Trading at a price-to-earnings (P/E) multiple of 13.3 times estimated 2017 earnings, that seems extremely reasonable given the 2017 expectations for EPS growth of more than 15%. The company also has $559 billion in cash equivalents on its balance sheet, versus $287 billion in total debt.

The dividend will jump to $0.25 from $0.20, and the company is expected to buy back $5 billion in stock through 2018.

Morgan Stanley investors receive a 1.8% dividend. Deutsche Bank has set its price target at $47. The posted consensus price objective is $48.42, and shares closed Thursday at $44.75.

Wells Fargo

This is another stock for investors to look at now for safety, dividends and solid upside potential, and it was among the biggest winners in the analyst’s view. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the Internet and mobile banking. It also has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.

Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue. The stock also remains a top Warren Buffett holding.

The report noted:

Wells Fargo was the biggest winner in our view given buybacks came in 50% higher than we expected. This should be a nice benefit given the relative lag in stock price performance (versus peers) post the election (-9%) and year-to-date (-5%). The bank passing the qualitative portion of the process is also a positive as it was a concern for some.

The dividend ticks up to $0.39 from $0.38, subject to board approval, while the bank is expected to repurchase a whopping $11.5 billion in stock, versus the analyst’s estimate of $7 billion.

Wells Fargo shareholders receive a 2.73% dividend. The Deutsche Bank price target is $60. The consensus price target is $57.59, and shares closed Thursday at $55.78.

Sticking with the big money center and investment bank leaders makes sense, especially with some volatility creeping back into the overall markets. The long-term outlook for all these large cap leaders is solid, and the financial strength that the stress tests and capital allowances confirm make the industry a very solid play for the second half of 2017. Investors may want to buy partial positions now as the stocks have run on the good news.