Are Banks' Net Payout Yields Attractive Now?

 |  Includes: BBT, C, COF, JPM, STT, USB, WFC
by: Stone Fox Capital

Pre financial crisis, banks provided some of the most consistent dividends, but the crisis for the most part wiped out the money returned to shareholders. Even the better banking stocks like JPMorgan (NYSE:JPM) only maintained small dividends of $0.20 or 0.4% on an annual basis. Basically just enough to claim they pay a dividend and not much more. Buybacks were all but outlawed by the regulators.

On Friday, the market got news from some of the large banks that the government will allow them to start returning capital to shareholders. Considering our focus on Net Payout Yields (combination of dividends and net stock buybacks) we wanted to analyze the forecasted payouts of the top banks to see which ones will now be at attractive yields.

Details based on recent company press releases:

  1. JP Morgan Chase (JPM) declared a quarterly dividend of $0.25, an increase of $0.20. JPM authorized a new $15 billion multi-year common stock repurchase program, of which up to $8B of purchases is approved for 2011.

  2. Wells Fargo (NYSE:WFC) declared a quarterly dividend of $0.12, an increase of $0.07. WFC authorized a common stock repurchase of 200 million shares, equal to roughly $6.4B at current stock prices.

  3. Capital One (NYSE:COF) maintained a dividend of $0.05 at the quarterly rate. No buyback was announced

  4. U.S. Bancorp (NYSE:USB) approved a 150% increase in the dividend rate, to $0.50 on an annualized basis. USB authorized a 50 million share buyback for 2011 or equal to $1.35B at current market price.

  5. BB&T Corp (NYSE:BBT) increased its annual dividend to $0.64, which is only a 6.7% increase above the current rate. No buyback was announced.

  6. State Street Corp (NYSE:STT) announced a quarterly dividend of $0.18, an increase of $0.17. STT authorized a buyback of up to $675M in 2011.

  7. Citigroup (NYSE:C) announced a 1-for-10 reverse stock split. Citigroup plans to reinstate a quarterly dividend of $0.01 after the reverse stock split.

The below table summarizes the potential yields. Potential because buybacks aren't always followed through. The yields for some of the stocks could be much lower if buybacks are lower than listed above:

Stock Dividend Yield Buyback Yield Net Payout Yield
JPM 2.2% 6.7% 8.9%
WFC 1.5 3.8 5.3
COF 0.4 0.0 0.4
USB 1.9 2.6 4.5
BBT 2.4 0.0 2.4
STT 1.6 3.0 4.6
C 0.1 0.0 0.1
Click to enlarge

When looking at the totals, it's clear that only JPM stands out with a 8.9% yield. These days it's very easy to create a portfolio with Net Payout Yields in excess of 6% and even as high as 8-9% for a concentrated portfolio of 15-20 stocks.

Capital One and Citigroup are clearly still struggling with yields way below 1%. Wells Fargo, US Bancorp, and State Street do offer attractive yields, but generally an investor can find an insurance, biotech, technology, or defense contractor offering much more attractive yields.

Our current Net Payout Yields portfolio includes Wells Fargo and Capital One, but based on these details Capital One will likely be cut and JP Morgan will be reviewed for addition. For JP Morgan to join the upper echelon of Net Payout Yield stocks, it all depends on whether that $8B will actually be used to buy back stock in 2011.

Most of the banks still remain conservative with dividends, so we'll continue watching this story and sector for changes that impact yields, especially whether the bank executives actually buy back stock. This will be a sign that they really do see value in this sector.

Disclosure: I am long COF, WFC.