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Late last Thursday, The Bank of New York Mellon Corporation (NYSE:BK) announced its decision to buyback shares worth $1.35 billion over the rest of the year [BNY Mellon to Repurchase up to $1.35 Billion of Common Stock, BNY Mellon Press Releases, Mar 14 2013]. The banking group also intends to increase dividend payout by 15% starting the second quarter of the year – a decision it will take to its board for approval in April.

This announcement by the world’s largest custodian bank hardly comes as a surprise given that it aced the Federal Reserve’s stress test earlier this month by ending up with the best capital ratios among the 17 bank holding companies tested under adverse conditions thrown against them by the Fed. [Methodology and Results for Stress Scenario Projections (PDF)], Federal Reserve Website, Mar 7 2013)) No doubt, the inherently stable nature of the custody banking business has a lot to do with BNY Mellon’s results. But the fact that the Fed approved the capital plan serves as a good indicator of the bank’s overall capital strength even as the bank seeks to return more cash to investors in the near future.

We are in the process of updating our $27 price estimate for BNY Mellon’s stock in view of the proposed capital return plan which will affect our price estimate favorably.

BNY Mellon paid out per share dividends of over $0.20 a share between 2005 and 2008, with the figure remaining at its peak level of $0.24 for seven quarters till Q4 2008 [BNY Mellon Dividend History]. As the recession set in and the bank faced huge losses, the dividend was slashed by nearly two-thirds to $0.09 per share in Q1 2009 and remained at that level till Q1 2011 – when the figure was increased to $0.13 per share. Over the last two years, although dividends have been maintained at this level, the bank also returned an additional $2 billion to investors by buying back its own shares.

The table below summarizes Bank of New York Mellon’s capital return figures for each year since 2007 and has been compiled using figures reported in annual reports:

(in $ mil) 2007 2008 2009 2010 2011 2012
Common Stock Dividends 884 1,107 599 441 593 623
Shares Repurchased - - - - 835 1,115
Total 884 1,107 599 441 1,428 1,738

Assuming that BNY Mellon’s board approves the share price hike starting Q2 2013, the bank will pay shareholders $0.15 per share for three quarters – implying dividends of $0.58 per share for the year 2013. This would suggest total dividend payments worth around $650 million for the bank assuming the number of shares remain constant.

That combined with the proposed $1.35 billion share buyback plan means that the bank will return $2 billion cash to its investors this year. We include dividend payouts and share repurchases in our analysis of BNY Mellon in the form of an adjusted dividend payout rate as shown in the chart below. Note that the figure for 2009 is shown as 0% as the bank ended up with a net loss that year.

Disclosure: No positions

Source: The Fed's Stress Test And BNY Mellon: 15% Dividend Hike And $1.35 Billion Share Buyback Approved