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At the beginning of this month, I expressed my opinion that Wells Fargo (NYSE: WFC ) , the nation's fourth largest bank by assets and the largest mortgage originator, would increase its quarterly dividend payout if given the approval from regulators to do so. This opinion is now confirmed. Now the question is whether or not its competitors, like Bank of America (NYSE: BAC ) will follow suit.
Wells Fargo hikes dividend payout
In a press release issued yesterday, Wells Fargo announced its decision to raise its quarterly distribution to $0.25 per share, up 14% from a previous payout of $0.22 per share. According to the bank's chairman and CEO John Stumpf: "The dividend increase approved by our board today was included in our 2012 Capital Plan and reflected the confidence we have in our company's performance."
While this is great news in and of itself, as it increases the yield on Wells Fargo's shares to 2.9% at today's price, the forward guidance given by Stumpf was even better. Again, according to his prepared remarks: "We remain committed to returning more capital to our shareholders. We requested an increase in capital distributions in our 2013 Capital Plan as compared to our 2012 plan, subject to review and non-objection by the Federal Reserve Board."
As I've discussed previously, prior to the financial crisis, Wells Fargo paid out anywhere between 35% and 50% of its earnings to shareholders. It subsequently ratcheted that back during the financial crisis and has been slowly building it up ever since. In the third quarter of last year, for instance, Wells Fargo distributed only 23% of its quarterly net income via dividends. With the most recent increase, in turn, the payout will continue its upward climb, coming in at 27% relative to the bank's fourth-quarter earnings.
For long-term income investors, the question is: How much higher can Wells Fargo's dividend go? And the answer to this is: It depends. More specifically, it depends on how much the company decides to payout and how much it makes. On the conservative side, I think its yield on today's price could grow to nearly 4%. This is assuming its earnings from the fourth quarter stay flat and that its payout ratio grows to 40%.
Speaking for myself only, a seemingly likely 4% payout ratio for an institution of Wells Fargo's quality is hard to pass up, and particularly when other income-generating vehicles are yielding next to nothing thanks to the Federal Reserve.
Will Bank of America follow suit?
For anyone watching the banking industry, Wells Fargo's announcement raises the question: Which other banks will follow suit? And while I'd like to say that all of them will, as essentially every too-big-to-fail bank has intimated the desire to, the decision of whether to actually allow it ultimately rests with the Federal Reserve.
Since the financial crisis, banks have had to submit their capital plans to regulators every year as a part of the now-annual stress tests. And it's only after this submission that institutions are given the go-ahead to make changes to their capital allocation strategies.
Submissions for 2013 stress tests were due earlier this month. Though this hasn't been confirmed, it's widely anticipated that banks like Bank of America and even Citigroup (NYSE: C ) will request permission to return more capital, be it through dividends or share buybacks.
In Citigroup's case, the Wall Street Journal reported that the nation's third largest bank by assets has asked regulators for permission to repurchase "just enough stock to counter dilution from routine share issuance." As a side note, the Fed's denial of a previous request by Citigroup was one of the factors that led to the departure of the bank's former CEO Vikram Pandit in the second half of last year.
In Bank of America's case, while CEO Brian Moynihan has steadfastly refused to answer questions on the issue, it's widely assumed that it too has asked the Fed for approval to up its current $0.01 per share quarterly dividend. Whether it gets approval appears to be dependent on two things. First, its capital levels. And second, the predictability of its earnings.
Though I've be wrong before, I personally believe it will get the go-ahead for a move in this regard. Even though its earnings have been admittedly unpredictable, due largely to a barrage of multibillion-dollar legal settlements, it's nevertheless stuffed to the gills with excess capital. At the end of the fourth quarter, Bank of America had a Basel III Tier 1 common capital ratio of 9.25%. That's the best among all too-big-to-fail banks, and a staggering 75 basis points higher than its requisite 8.5% level. In other words, there's billions of dollars in captive capital just waiting to be distributed, and there are fewer and fewer reasons for the regulators to stop the bank from doing so.
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