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PNC Financial Services Group (NYSE:PNC) just announced that it will raise its quarterly dividend payout from $0.10 to $0.35 per share. In addition, the bank plans on spending as much as $500 million to repurchase shares in 2011. For the financial industry, this is another positive sign for the increasing health of bank balance sheets. The management's decision to repurchase shares may also be very bullish for equity holders, as this sends a clear signal that PNC's management views the stock as a undervalued.

Stronger Than It Appears
While the $0.35 quarterly dividend is a nice increase, it hides the company's true implied dividend paying capacity. PNC is allocating $500 million to share buybacks, but if the company had allocated the $500 toward dividend payments, with 525.51 million shares outstanding, it could have paid an additional $0.2379/share. In other words, if it had focused excess capital into dividends, it could have announced a $0.5879/share quarterly dividend. This nearly returns the dividend close to the pre-crisis levels of $0.66/share.

The dividend paying capacity (dividend + share buyback) is much higher than the headline dividend jump and it is an extremely bullish situation for bank equity investors and dividend investors.

Other Names to Watch
PNC is not the only bank that has raised rates following the March 18, private disclosures from federal regulators regarding which of the banks could increase dividend payments. Some banks, like Wells Fargo (NYSE:WFC), JP Morgan (NYSE:JPM) and US Bancorp (NYSE:USB) chose to increase dividends immediately while PNC chose to delay the decision until its regularly scheduled meeting. Goldman Sachs (NYSE:GS) took the opportunity to repurchase the 10% preferred stock that it issued to Berkshire Hathaway (NYSE:BRK.A) during the financial crisis.

How to Profit
The simplest way for investors to bet on continuing strength and dividend increases from the banking industry may be through the underlying equities. But as we have previously discussed in "TARP Warrants: Hidden Value Among the Mega Banks," we think the TARP warrants are interesting investment opportunities because they offer leveraged exposure to bank stock prices as well as dividend payouts. The warrants are long dated call options on the bank stocks with warrant class specific anti-dilution protections against dividends and various other corporate actions.

Money Center Bank Warrants to Watch
Here is a short list of money center bank warrants that investors can follow. I have also included excerpts from the prospectus that pertain to the anti-dilution features related to quarterly cash dividends.

BANK OF AMERICA

BAC-WTA
Expiration: January 16, 2019
Strike: $13.30
Price: $7.80

Quarterly dividend threshold for strike readjustment: $0.01 Additionally, the exercise price of, and the number of shares of our common stock underlying, the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.01 per share of common stock, which is the amount of the last dividend per share declared prior to the date on which the warrants were originally issued to Treasury on January 16, 2009.

BAC-WTB
Expiration: Oct 28, 2018
Strike: $30.79
Price: $2.54

Additionally, the exercise price of, and the number of shares of our common stock underlying, the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.32 per share of common stock, which is the amount of the last dividend per share declared prior to the date on which the warrants were originally issued to Treasury on October 28, 2008.


CITIGROUP

C-WTA
Expiration: Jan 4, 2019
Strike: $10.61
Price: $0.88

Quarterly dividend threshold for strike readjustment: $0.01

Additionally, the exercise price of, and the number of shares underlying, the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.01 per share of Common Stock, which is the amount of the last dividend per share declared prior to the date on which the warrants were originally issued to Treasury.

C-WTB
Expiration: Oct 28, 2018
Strike: $17.85
Price: $0.20

Quarterly dividend threshold for strike readjustment: $0.16 per share.

Additionally, the exercise price of, and the number of shares underlying, the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.16 per share of Common Stock, which is the amount of the last dividend per share declared prior to the date on which the warrants were originally issued to Treasury on October 28, 2008.

JPM
JPM-WT
Expiration: Oct 28, 2018
Strike: $42.42
Price: $17.45

Quarterly dividend threshold for strike readjustment: $0.38 per share.

Additionally, the exercise price of, and the number of shares underlying, the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.38 per share of common stock, which is the amount of the last dividend per share declared prior to the date on which the warrants were originally issued to Treasury in October 2008.

PNC
PNC-WT
Expiration: Dec. 31, 2018
Strike: $67.33
Price: $15.00

Quarterly dividend threshold for strike readjustment: $0.66 per share.

If we increase our regular quarterly dividends in the future, your warrants will not be adjusted for, and you will not receive any benefit of, any aggregate regular quarterly dividend less than or equal to $0.66 per share.

WFC
WFC-WT
Expiration: Oct. 28, 2018
Strike: $34.01
Price: $11.34

Quarterly dividend threshold for strike readjustment: $0.34 per share.

Additionally, the exercise price of and the number of shares underlying the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.34 per share of common stock, which is the amount of the last dividend per share declared prior to the date on which the warrants were originally issued to Treasury on October 28, 2008.



Warnings
As we mentioned in previous articles, there are reasons to be cautious when dealing with the warrants.

  1. Stock price matters! If the warrants are undervalued relative to the reference bank's stock price, it's not a good investment unless you also think the reference bank's stock price is undervalued too.
  2. Warrants are derivatives and as such, you need to understand that risks are not linear. One major risk results from the often significant amount of time value assigned to these long dated warrants. If Citigroup were to be acquired tomorrow, even if the stock is purchased for a premium, you could lose money on your warrants if the premium is less than the loss of option time value.

Disclosure: I am long PNC, C, BAC.