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BNY Mellon Shows Support For CEO As Pressure Mounts

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Summary

  • The Bank of New York Mellon Corporation has received approval to increase its buyback target to $3.1 billion after getting approval from the Federal Reserve by clearing the CCAR.
  • Shareholders are looking at a potential return to investors of $3.8 billion over the next year and reacted positively to the news, sending stock up by 2.5%.
  • BNY Mellon has been facing hostility from Marcato Capital Management LP, which has called for the current CEO to be removed from his position.
  • The bank has shown support for its leadership by disclosing an increased pay package of $11.7 million for its CEO, Gerald Hassel.
  • Despite increasing total revenues, net income has fluctuated over the past years. However, shareholder value has improved since Hassel took over in 2011.

The Bank of New York Mellon Corporation (BK) has managed to increase its share buyback target to $3.1 billion between now and the end of March 2016, after getting approval from the Federal Reserve by clearing the central bank's Comprehensive Capital Analysis and Review (CCAR). All this comes at a time when investors in the company are demanding that the current CEO Gerald Hassel be replaced.

Taking a look at the company's dividend payout schedule for the past five years, we can see that the New York based bank has consistently raised dividend payouts in an effort to satisfy shareholders. In 2010 dividend payouts stood at $441 million and gradually increased over the years to its current position of $760 million recorded in the 2014 report. Given that the bank has now been granted approval to increase its share buyback target to $3.1 billion and that the bank's dividend payout this year will remain unchanged at $0.17 per share for the next four quarters, we are looking at a potential return to investors of $3.8 billion over the next year. Indeed investors are happy about the initiative and when the news broke Bank of New York Mellon stock went up by 2.5% on Thursday, 12th March.

But the timing of it all seems rather suspicious. The company has been facing hostility from Marcato Capital Management LP, which has called for the current CEO to be removed from his position and that the company cut costs to improve operations. The fact that the company faced public aggression from Marcato is not unnerving on its own. The San Francisco based capital management company owns a 1.6% stake in Bank of New York Mellon Corp and went public with its criticism of the board by releasing a public letter and presentation to shareholders in defense of its case. What is actually worrying is that another activist investor is already trying to make an impact in the boardroom. The larger activist firm, Trian Fund Management LP, which has had a board seat since December, was already pushing the bank's management to fix expenses. However, where the two fund management companies differ is when it comes to management. While Marcato strongly believes that a major reshuffle in the executive board is needed, Trian has been pacified as of recently, with co-founder Ed Garden (who is on BNY Mellon's board) insisting that they are ready sticking behind current management after being reassured of their concerns.

So the question is whether or not CEO Gerald Hassel will leave the company. Let's take a look at the facts. First of all, despite having a 52-week return of 24.43% the company stock has not been faring well this year. The stock has fallen about 3% since the start of 2015 and continues to show volatility, especially with news of activist investor firms' demands hitting the market. Moreover, the Bank of New York Mellon Corp disclosed an increased pay package of $11.7 million for its CEO; a move which is sure to ruffle feathers at Marcato. Even though Hassel's base salary of $1 million remained unchanged, his overall salary rose by more than 23% based on additional stock awards worth $7.8 million as compared to $4.7 million last year, and pensions of $1.7 million as compared to $0.28 million awarded in the previous year. So it definitely seems like the board is planning to stick behind its current leader at the moment. And it is not exactly surprising. Even though net income has fluctuated in recent years while total revenue has risen, what remains unchanged is that BNY Mellon is the second company in the past month that Marcato Capital Management LP has targeted after it gave a board seat to another activist firm. The San Francisco based investment firm has a right to be concerned since BNY Mellon is its largest position, making up about 20% of its publicly disclosed holdings. The investment firm has reiterated that the bank needs to cut costs and even slash 10%-20% of its more than 50,000 employees. And it is not like Hassel hasn't tried cutting costs. After he took over in 2011, he agreed to sell the company's headquarters in lower Manhattan for $585 million and promised to book $80 million to $100 million in severance costs in the second quarter of last year for an unspecified workforce reduction.

For the moment it seems like Hassel is here to stay as the board seems to be insisting that since the CEO took over, shareholder value has improved even if operational efficiency might have suffered. His efforts to cut costs might seem unsatisfactory to a firm like Marcato but the board sees it as an improvement from its last CEO, Robert P. Kelly, who left the company after a spat with the directors over the way he ran the company. With the company stock currently trading at $40.80 per share and with the board having gotten an approval for a $3.1 billion share buyback the stock seems to be in a decent position for the upcoming year.

Analyst's Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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