Neal Goodwin, Lead Editor
Today, we take a look at 12 financial institutions that are poised to increase dividends as they continue to recover from the financial crisis. All of these stocks paid exceptionally higher dividends before the crisis hit, so they are prime candidates to increase dividends considerably in upcoming quarters. Earlier this year, the Fed concluded that several banks have adequate reserves to renew dividend payments to shareholders.
Now that many institutions have laid out their plans, investors can trade on bank statements regarding dividends going forward. For macro investors, renewed dividend payments may be a sign of increased confidence by executives eager to reward shareholders with cash sitting on the balance sheet.
Huntington Bancshares Inc (HBAN): At this point in the financial crisis recovery, regional banks are much more certain than national banks, and it is in the last stages of recovery, they should be ready to begin the growth process following the crisis. HBAN currently does not provide incredibly high dividends, only rewarding a dividend of $0.04 and a yield of 0.60%, but it is poised to increase dividends soon. With a payout ratio of only 13% and an operating margin of 19%, it would be easy and beneficial to increase dividends for HBAN, and we should see substantial increases as it recovers from the financial crisis.
HBAN operates as the holding company for the Huntington National Bank, which provides commercial and banking services. It has excellent projected growth rate of over 200% for 2011 and has a P/E of only 19.20. Before the financial crisis HBAN consistently traded in the mid 20s, and as it recovers it should see an increase closer to that level than its current trade of $6.53. Targets for the stock are around $8-$9. Activity on insider buys has been increasing as or late, and HBAN should see increases in both values and dividends in the upcoming quarters. This is a great long term buy, and could see a benefit of 100% to 200% return in the next few years.
Regional Financial Corporation (RF): This is the holding company for the Regions Bank that provides a range of commercial, retail and mortgage banking services in the U.S. RF has very similar financials to HBAN. It has a dividend and yield of $0.04 and 0.60%, respectively, and currently trades at $6.27. Prior to the crisis RF was trading consistently in the 30s, so there is a lot of potential for growth. RF is still dealing with allegations from the Fed, and are likely to soon be making a payment in the range of $200M to settle its charges.
In addition, it is under scrutiny of its audit committee as to whether bank executives delayed the disclosure of toxic loans during the financial crisis. RF currently has negative net operating margins, returns on assets, equity, and investments, and EPS; all bad indicators. RF has an extremely low payout ratio so it could increase dividends if it wants to. However its financials are not stable at this time. Keep an eye on RF to right the ship, but for now stay as a spectator.
SunTrust Banks, Inc (STI): One of the nation's largest commercial banking organizations, SunTrust is a diversified financial services holding company with a broad range of financial services for consumer and corporate clients. STI is only paying a dividend and yield of 0.04 and 0.20%, respectively. However before the financial crisis the dividend was $0.77. With a current payout ratio of only 8% and an expected growth over the next two years of over 700%, this number is certain to increase considerably, rewarding those who are confident in STI.
Before the crisis STI was consistently trading in the 70s and 80s, well above its current $26. STI's 1 year estimate is around $32, and long term should be able to continue upward momentum resulting in a profitable investment. STI is a good long term buy. Berkshire (BRK.A) and David Tepper's Appaloosa Management exited last year, though, we think that STI is one of the best values among its loan-and-banking peers.
KeyCorp (KEY): KeyCorp has a better dividend and yield than our previous two stocks, providing $0.12 in dividends and a yield of 1.50%. With a measly payout ratio of 5%, and an operating margin of 28.3% this is a yield that should see increases in the future. KEY is the parent holding company for Key Bank National Association through which banking services are provided and in the last three quarters has started to see increases in EPS for the first time since 2007, and it is projected to grow over the 2011 year by over 65%. With a P/E of 11.07 and a PEG of 0.63 KEY appears to be healthy and moving upward.
At the end of the last quarter investment veterans moved to buy or add shares of KEY at a considerable rate, estimating the price range to be in the $8.54 to $9.71 spectrum. KEY has since fallen to as low as $7.90, but now sits at $8.30 and looks to be gaining some positive momentum. Current volume has slowed a little compared to its three month average. KEY does sit a little below its book value, and should see increases in the near future. I like KEY as a hold, with buy potential assuming dividend increases.
JP Morgan (JPM): JP Morgan already provides a decent dividend of $1.00, resulting in a yield of 2.5%. Even so, it has a minuscule payout ratio of 4% and a large room for increase with an operating margin of 38%. JPM is an excellent long term buy. At this point any large bank is suspect due to high levels of risk associated with the Greek debt crisis. However, JPM has excellent peripherals. It has a P/E of 9.2, a PEG of .94, and is expected to grow by 12% in the upcoming quarter and 19% in the quarter after that. Its EPS has grown by nearly 50% over the past year and revenue has been stable over the last two years.
Dividends prior to the financial crisis were $0.38 per quarter, or $1.52 over a full year. JPM will surely return dividends to similar levels once it has cleared itself from the financial crisis, and projections point toward doing so soon. JPM is well below its book value, and is a great value long term buy. Expect dividends increases as well as value increases. We think it also offers an excellent options-based play. JPM is one of the safer buys within the investment banks.
If you are even bolder in your investment choices, however, our next few stocks are perfect for you.
Bank of America Corporation (BAC) and CitiGroup (C). BAC and C showed spectacular capitulation back in the spring of 2009. Both of these companies have been saddled with bad debt, but the balance sheets at both companies appear to be on the mend.
BAC has dividends of 0.04 resulting in a .4% yield. With a payout ratio of 5%, dividends could easily be increased, but an operating margin of only 14.6% makes it less of a candidate than our last subject, JPM. C pays dividends of $0.04 resulting in a yield of 0.10%, and with operating margin of over 35% it could easily increase dividend payments.
BAC and C may be the riskiest of the stocks on this list. However with that comes big potential rewards. BAC is trading at about half of its book value and is down about 30% from its 52-week high of $15.20 in January. C is also considerably below book value. Both of these do have considerable downside risk. BAC as a result of a number of pending and growing lawsuits regarding pay and foreclosures, and C because of a devaluation as a result of a 10-1 reverse stock split in March that resulted in C pushing away many retail investors. If the legal trouble for BAC continues to grow, it would be a good idea to stay away from the stock. However, if the legal issues subside, BAC is a great long term play with a lot of potential for increases in both share price and dividends.
While dividends are only minimal per quarter currently, before the financial crisis BAC was shelling out $0.64 per quarter, adding up to $2.56 per year and a yield around 5% before hitting the mortgage crisis. C was providing dividends of $3.20 per quarter, resulting in $12.80 per year for a yield over 2%. My feeling is Uncle Sam will not let big banking corporations go down without a fight, so with that in mind BAC and C are great long term buys as they are both sitting below 20% of their pre-crisis levels. BAC and C come with considerable risk, but the potential rewards are huge.
BB&T Corporation Common Stock (BBT): This company currently has the highest payout ratio on our list, making it a less likely candidate for increased dividends in the near future. However, in the last eight months it has become very active in lending to small businesses. In North Carolina BBT has written 129 loans for $20.9 million between November and May, making it the most active lender in the state. With increased activity and good judgment in lending BBT should see increased cash flow and income, resulting in a higher operating margin (currently 18%), lower current payout ratio (currently 49%), and allowing it to increase dividends. BBT does currently have a strong yield of 2.5%. Its P/E of 21.04, and with a PEG of 1.26 and expected growth rate of 49% for 2011, BBT appears to be stable for the time being. Popular sentiment points toward BBT as a hold, and I agree with this assessment.
Wells Fargo & Co (WFC): Wells Fargo has very good peripherals compared to the industry. P/E (11.10), P/B (1.18) and P/S are all above industry averages. Projected growth for 2011 (22.57%) and 2012 (24.42) are impressive and realistic considering recent growth rates, and management effectiveness is impressive with above average net profit margin, return on assets, and return on investments compared to industry competitors. WFC currently yields at 1.80%, and has an extremely low payout ratio of only 9%. Considering operating margin of nearly 28% dividends could be on the rise soon. WFC appears to have hit a recent trough and should be on the rise. It is well below its 52-week average of $34.25, currently sitting at $26.78.
WFC has been a popular choice of hedge funds recently, as total hedge fund positions are greater than 5 million in the stock right now. WFC is a buy, as it has great value currently and should see solid returns.
US Bancorp (USB): USB has been another favorite of hedge funds recently, holding over 1.3 million positions. A 31% operating margin is strong and its payout ratio of 26% has room to increase if the company chooses to increase dividends, and which is likely considering USB has hovered around a 50% payout ratio over recent years. Currently USB is yielding at 2% with a $0.50 dividend. USB is expected to grow by 27% in the current calendar year and by 19% for 2011, very similar to growth rates of 21% and 18.7% in recent quarters. It also is poised to increase dividends as it recovers from the financial crisis. Current dividends of $.50 are considerably below pre crisis dividends of $1.72. Management is also very effective compared to industry averages, exceeding competitors in net profit margin (0.19 compared to 0.11), return on assets (1.2 compared to 0.7) and return on investment (6.2 compared to 3.6) by considerable amounts. Donald and Stephen Yacktman also recently increased their position in USB by $46 million to add to a current holding of $203 million in the stock. This stock appears to be on the rise, and I give it a buy rating.
PNC Financial Services Group (PNC): PNC already pays a dividend of 1.40, resulting in a 2.5% yield, and has a payout ratio of only 6%. Prior to the financial crisis PNC was paying dividends of 2.44, so expect an increase soon. PNC is also 15% below its 52-week high, and has a P/E of only 8.52 with impressive EPS of 6.61, so there is room for improvement. The target price for PNC is $74.08, well above its current $56.33 trade price. PNC recently agreed to acquire RBC US Bank for $3.45 billion, and with its track record of successful assimilation, this acquisition should prove to be smooth and beneficial for PNC's value. This deal gives PNC a great door to enter the southeast market, and increases its total branch volume by 15%, ranking 5th among U.S. banks with 2,870 branches. Among 32 different analysts covering PNC stock, 26 of them give PNC either a buy or strong buy rating. PNC has strong peripherals, good management, and a good future outlook. PNC is a buy.
American Express (AXP): AXP is currently one of Goldman Sachs' best performing buys, largely because key factors for credit card companies, such as the best charge off and payment rates in the country and an increasing loan rate, are looking positive for AXP. It currently pays a dividend of $0.72 and yields 1.40%. With a payout ratio of 20% and a 25% operating margin, there is room for increases. AXP has a 1:1 ratio of P/E and expected growth rate for 2011, a healthy indicator. Impressively, its EPS growth is 90% for the last year increasing to 3.59, and its revenue growth is 13% for the past year. Hedge Fund Egerton Capital recently doubled its position in AXP from $44 million to $89 million. The initial $44 million position was bought in December 2010, so this increase in position shows its confidence in the purchase. Management effectiveness passes the eye test as it is above industry averages in net profit margin (0.14 to 0.12), return on assets (3.0 to 2.10), and return on investments (5.60 to 3.80). I give AXP a buy rating.