JPMorgan, Goldman Fall With the Dow Despite Fed Capital-Plan Approvals

The Dow Jones Industrials hardly moved at midday on Thursday morning, as the index's bank components moved in opposite directions after the Fed's capital-plan review.

Mar 27, 2014 at 12:30PM

As of 12:30 p.m. EDT Thursday, the Dow Jones Industrials (DJINDICES:^DJI) had dropped a slim six points. But one of the biggest news events in the stock market came after the close Wednesday afternoon, when the Federal Reserve announced its decisions on the capital plans that JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), American Express (NYSE:AXP), and dozens of other banks had submitted. Although the Fed approved all three of the Dow banks' plans, their stocks aren't all reflecting that good news, with downward moves for Goldman and JPMorgan.

What the Fed said
In its annual Comprehensive Capital Analysis and Review program, the Federal Reserve reviewed 30 banks and the proposals they made for returning capital to shareholders, either through higher dividends or share repurchases. The Fed approved 25 of those capital plans, with the most notable exception being Citigroup, which had sought a 400% dividend increase and a $6.4 billion share buyback.

Federal Reserve. Source: Dan Smith.

For JPMorgan, the approval means that the bank will be allowed to buy back $6.5 billion in shares over the next year. JPMorgan will also raise its dividend by about 5% to $0.40 per share quarterly, bringing its yield up to roughly 2.7% based on its current share price. Some investors had been holding out for a larger dividend increase of up to 10%, but CEO Jamie Dimon said JPMorgan is seeking to reach a Tier 1 common ratio of 10% by the end of the year, and the smaller dividend increase should help it accomplish that goal.

Meanwhile, Goldman's capital plan was approved after the bank was forced to make changes to the request over the past week. Unlike most other banks, Goldman didn't immediately release details on exactly what its measures will mean for investors. But over the past year, Goldman has made extensive share repurchases, as well as paying a solid dividend.

Finally, American Express announced its plan to raise its dividend 13% to $0.26 per share and to buy back $5.4 billion in common stock over the next 12 months. The bank sees the moves as consistent with its long-term strategy to return half of its generated capital to shareholders. Even with the move, though, American Express' dividend yield will remain low at just 1.2%.

Are the Dow's banks falling behind?
Other major banks outside the Dow made much more dramatic moves than did JPMorgan, AmEx, and Goldman. Wells Fargo (NYSE:WFC) raised its dividend by 17%, or a nickel per share, to $0.35 per share quarterly. That sent the bank's yield much closer to 3%. But even more dramatic was its repurchase authorization to buy back up to 350 million shares, or $17 billion in stock at current pricing. With Wells Fargo having become the most profitable lender in the U.S., the moves reflect its capital strength. At the same time, Bank of America quintupled its dividend, finally getting it above 1% and marking another step on the bank's road to recovery.

Still, the moves from the banking industry generally reflect their having taken advantage of the strengthening U.S. economy. The big test will come when the next downturn arrives, but until then, JPMorgan Chase, Goldman Sachs, and American Express should continue to generate the returns they need to support their capital plans for the foreseeable future.

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Dan Caplinger owns warrants on JPMorgan Chase, Bank of America, and Wells Fargo. The Motley Fool recommends American Express, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of JPMorgan Chase and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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