Financial sector stocks were the well-publicized whipping boys of the 2008 financial crisis. The sector overall has recovered only slightly from its early 2009 lows and has remained essentially flat since then. Two major risks-neither perfectly quantifiable nor predictable-hang over the sector at this time.
One is the housing crisis; potential issues here range from the ultimate size of write-downs of mortgage-backed securities to litigation over the issuance of those securities to a housing market that remains depressed with no encouraging signs. The lack of a recovery in home prices decreases the recovery lenders can expect on defaulted mortgages and increases the amount of time foreclosed properties linger unsold. The foreclosure process itself is in question because of the "robo-signing" scandal, though some banks have availed themselves of a large-scale settlement with various state attorneys general.
The other is the European debt crisis. The journey toward a solution has been slow and painful, and questions remain about economies like Italy, Spain, and even France that would pose a much more substantial danger to the European and global economies than Greece. The unfortunate fact is that this crisis is unlikely to be satisfactorily resolved in 2012.
Bearing in mind this shared economic landscape, we'll consider the likelihood that six financial services stocks will increase their dividends in 2012.
JPMorgan Chase & Co. (JPM) currently has a dividend yield of 2.69%, a payout ratio for the trailing twelve months (TTM) of 22.0, and dividend growth (over five years) of ‒5.96%. JPM's 2010 cash flow was +$1.361 billion, its first positive cash flow since 2006. Earnings per share (EPS), excluding extraordinary items, for the TTM was $4.47. S&P predicts $5.13 for 2013.
As with most large U.S. banks, growth forecasts are tepid: ‒1.7% for 2012 and 1.8% for 2013. JPM's debt-to-capital ratio has been above the industry average for past five years. Insider trends are heavily negative over the past 90 days. On a positive note, JPM was part of the "robo-signing" settlement, which removes some of the uncertainty stemming from the mortgage crisis.
Its current indicated annual dividend is $1.00. We assess the likelihood of a 2012 dividend increase as LOW. JPM, founded in 1823, has paid dividends since 1827-quite a stellar record. Dividends represented ‒5.5% of operating cash flow for the trailing four quarters (TFQ) ending March 2011. In March 2011, the Federal Reserve approved an increase in JPM's quarterly dividend from $0.05 to $0.25. With a negative growth outlook for this year and a substantial dividend increase last year, we find it unlikely that JPM will increase its dividend in 2012.
First Niagara Financial Group Inc. (FNFG) currently has a dividend yield of 3.40%, a payout ratio for the TTM of 106.1, and a dividend growth (5Y) of 6.83%. FNFG's 2010 cash flow was ‒$22 million, down from +$122 million in 2009. EPS (excluding extraordinary items, TTM) was $0.64; average analyst estimates are $0.97 for 2012 and $1.10 for 2013.
Growth forecasts are 32.1% for 2012 and 45.3% for 2013. FNFG is a small but growing company, and its net margin has been above the industry average for each of the past five years. Insider activity is positive over the past six months.
Its currently indicated annual dividend is $0.32. We assess the likelihood of a 2012 dividend increase as LOW. Dividends represented 66.9% of operating cash flow for the TFQ ending September 2011, which is a substantial burden. Furthermore, FNFG acquired NewAlliance Bancshares in 2011 and Harleysville National Corporation in 2010, and if the company continues growth through acquisitions, this is likely to further reduce cash available for dividends.
Goldman Sachs Group Inc. (GS) currently has a dividend yield of 1.23%, a payout ratio of 31.0, and dividend growth (5Y) of 1.91%. GS's 2010 cash flow was +$1.497 billion, down from +$24.486 billion in 2009. GS had positive cash flow in 2006 and 2007, turning negative only in 2008. EPS (excluding extraordinary items, TTM) was $4.42, with S&P predicting $11.95 in 2012 and $13.00 in 2013.
GS seems to be adapting its business model to adapt to new market realities. IPO activity remains low, reducing revenue opportunities, though M&A activity prompted by cash-rich companies purchasing weakened competitors is a positive. Growth forecasts are 14.7% for 2012 and 21.5% for 2013. Insider trends are positive.
Its indicated annual dividend is $1.40. We assess the likelihood of a 2012 increase as MEDIUM, probably in the second half of 2012. Dividends represented 28.9% of operating cash flow for the TFQ ending September 2011, but substantially increased earnings in 2012 should also increase available cash. If the GS board feels comfortable with global economic conditions as the year progresses, it is possible that they would authorize a dividend increase.
Citigroup Inc. (C) currently has a dividend yield of 0.13%, a payout ratio of 0.8, and dividend growth (5Y) of ‒72.65%. C's 2010 cash flow was +$2.500 billion, its first positive cash flow since 2007. EPS (excluding extraordinary items, TTM) was $3.66, and S&P predicts only $3.70 for 2012 increasing to $5.00 in 2013.
Growth forecasts are ‒1.3% for 2012 and 2.3% for 2013. Insider trends are moderately negative over the past six months but neutral over the past 90 days.
Its indicated annual dividend is $0.04. We assess the likelihood of a 2012 increase as HIGH, probably in Q2 or Q3. Despite a negative growth outlook for 2012, this is a case of "nowhere to go but up." C just reinstated its dividend payments in 2011, and a penny per share per quarter is hardly burdensome-dividends represented just 0.5% of operating cash flow for the TFQ ending June 2011. C has indicated that it hopes to return capital to shareholders in 2012, which means stock buybacks, higher dividends, or both. We expect that the company will follow through on these promises, though we find it unlikely that any dividend increase will be particularly dramatic.
Wells Fargo & Company (WFC) currently has a dividend yield of 1.59%, a payout ratio of 16.9, and dividend growth (5Y) of ‒14.97%. WFC's 2010 cash flow was ‒$11.036 billion; previously it was positive in 2008 and 2009 but negative in 2006 and 2007. EPS (excluding extraordinary items, TTM) was $2.82, and S&P predicts $3.32 in 2012 and $3.56 in 2013.
Growth is forecast to be 0.1% for 2012 and 3.4% for 2013. Insider trends are mildly positive. WFC was also part of the "robo-signing" settlement. Its debt load had reached troubling levels but is improving, and it has repaid its TARP obligations.
Its indicated annual dividend is $0.48. We assess the likelihood of a 2012 increase as HIGH, as soon as March 2012. Another "old reliable" company, WFC has been paying dividends since 1939. It added a special cash dividend beginning in Q1 2011 of $0.07 in addition to its existing dividend of $0.05, and continued payment at this $0.12 per share level through 2011. Dividends represented only 3.9% of operating cash flow for the TFQ ending March 2011, so an increase would be easily manageable.
Bank of America Corp. (BAC) currently has a dividend yield of 0.51%, a payout ratio of 744.3, and dividend growth (5Y) of ‒54.80%. Cash flow was ‒$12.912 billion in 2010, down from +$88.482 billion in 2009. Specifically, cash from operations decreased by about $47 billion and cash from investing activities, from +$157.9 billion to ‒$30.4 billion. EPS (excluding extraordinary items, TTM) was ‒$0.03; S&P expects $0.72 in 2012 and $1.08 in 2013, though these represent reduced estimates issued in January 2012.
Growth forecasts are ‒1.9% for 2012 and 2.4% for 2013. Insider trends are strongly positive. BAC also signed on to the "robo-signing" settlement. As with JPM, its debt-to-capital ratio has been above the industry average for the past five years.
Its indicated annual dividend is $0.04. We assess the likelihood of a 2012 increase as MEDIUM. BAC's paltry $0.01 quarterly dividend is a long way from its former days of glory, as the 5-year dividend growth figure makes clear, though it did manage to eke out a track record of continuous dividend payments since 1903. Like the other big banks, it is facing anemic growth forecasts thanks to slower revenue growth and continued uncertainty about the mortgage mess, and the Countrywide acquisition remains an albatross around its neck. Nevertheless, it still has plenty of cash on hand, and dividends represented only 1.0% of operating cash flow for the TFQ ending September 2011. If Citigroup announces a dividend increase, BAC may feel obligated to follow suit.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.