6 Banks That Raised Dividends While Reducing Payout Ratios

by: Zvi Bar
The dividend payout ratio is often an important factor when considering dividend-paying investments. The ratio measures the size of a dividend payment compared to the company's net income.
A higher dividend payout ratio leaves a lower percentage of total income within the company. This means that while the owners are receiving income, the company’s ability to grow may be hampered by a lack of income to reinvest. Moreover, where the payout is too high, it may indicate that the dividend is too high and in danger of being reduced.

Lower dividend payout ratios are often found in companies that prefer to reinvest their income into the business. This reinvestment if sensibly performed in order to produce growth will hopefully, eventually increase income. That increased income could then cause the company to appreciate in value and/or increase its dividends.

Those companies that have decreased their dividend payout ratios while still raising their dividends could be considered to have strong prospects of both future dividend growth and potential appreciation (or at least greater value).
Within the financial industry, several competitors needed to reduce their dividends at the onset of the recent financial crisis and hold reserves to offset potential future losses. Additionally, many did have future losses and/or reduced income since the crisis. Nonetheless, several have already begun to raise their dividends and many have been able to do so while reducing their payout ratios.
The following six financial institutions have, over the last 3 years, increased their dividends and decreased their payout ratios:

Cardinal Financial Corp. (NASDAQ:CFNL)
  • Industry: Regional Banks (Southeast)
  • Market cap: $308.4 million.
  • Yield: 1.1%.
  • Short Position: 2.8%
Columbia Banking System Inc. (NASDAQ:COLB)
  • Industry: Savings & Loans
  • Market cap: $681 million.
  • Yield: 1.2%.
  • Short Position: 7.6%
East West Bancorp, Inc. (NASDAQ:EWBC)
  • Industry: Regional Banks (Pacific)
  • Market cap: $2.7 billion.
  • Yield: 1.1%.
  • Short Position: 2.2%
First Commonwealth Financial Corp. (NYSE:FCF)
  • Industry: Regional Banks (Northeast)
  • Market cap: $566 million.
  • Yield: 2.2%.
  • Short Position: 5.7%
Fulton Financial Corp. (NASDAQ:FULT)
  • Industry: Regional Banks (Northeast)
  • Market cap: $2.1 billion.
  • Yield: 1.5%.
  • Short Position: 3.1%
Wells Fargo & Company (NYSE:WFC)
  • Industry: Money Center Banks
  • Market cap: $136 billion.
  • Yield: 1.8%.
  • Short Position: 0.7%
While it appears that financial institutions still carry a good deal of risk, the fact that these companies have been able to both retain more income and increase their dividend payouts is at least one sign of health. Generally speaking, many regional banks are considered risky and potentially now on thin ice, which is seen by their above average short positions.

If this trend continues, these companies may be expected to continue raising their dividends over the coming years. Of course, should any shockwaves hit these businesses, their income may deteriorate and, along with it, any prospects for increased payouts.

Disclosure: I am long WFC.

Disclaimer: Yield is but one factor in choosing a proper investment. Potential trust investments should be considered on their own merit and relative to the total portfolio of investments.