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BNY Mellon Passes the Stress Test and Passes Along the Winnings

It's good to be in the elite circle. Not only did Bank of New York Mellon (NYSE: BK  ) ace the Federal Reserve's comprehensive capital annual review, it posted some of the highest and sturdiest numbers out of the 18 financial institutions in the exam room. As a bank -- and a well-capitalized yet conservative one at that -- it's not going to celebrate by raining champagne and confetti on its shareholders. Rather, it'll reward them with a decent dividend increase and a share repurchase program.

Thursday evening, the Fed released the second part of the annual banking stress test results, which examined the largest U.S. banks' ability to make capital distributions and maintain certain capital levels during an economic downturn. BNY Mellon's numbers started out high and stayed there, even under the most dire scenarios envisioned by the Fed:

The company's tier 1 capital ratio this past Q3 was one of the highest of the 18 test subjects. More admirably, it held rock-steady under the impact of the Fed's doomsday projections (OK, that's probably describing them too strongly, but that's a debate for another time).

To the victors, the spoils
Was there much doubt that BNY Mellon would get its plans approved? After all, the bank wasn't asking for anything outrageous. A 15% hike in the dividend and a $1.35 billion buyback program are modest outlays compared to the more ambitious requests from some of the other banks that went through the tests.

Besides, as the nation's major financial custodian,it's a conservative and cautious institution. As a rule, it doesn't typically over-extend itself, and it's not asking to now. The requested dividend boost is only $0.02 per share more than the previous distribution, or something around $23 million in extra payout every quarter. Meanwhile, the company generated $687 million in gross tier 1 common equity in Q4, deploying less than half that amount for dividends and buybacks. So, $23 million looks well within the affordable zone for the bank.

And that seemingly big number for the company's stock repurchase program? Firstly, it's only 16% higher than last year's Fed-approved buyback war chest -- hardly a drastic increase. Secondly, even if the company spent the full allotment every quarter, it would still (again, using the Q4 figures) be well in the black.

Slow and steady
BNY Mellon is never going to be the sexiest banking institution on the market. It makes its profit the steady and modest way, collecting fees for the many custodial and associated services it provides. As such, although it's subject to the general flow of the market due to its business profile, it's less volatile than some of its fellow big financials. Which is good, because it can withstand the kind of short, sharp economic shocks modeled by the Fed. And benefit its shareholders when it does so.

Can the bank continue to bestow such rewards, though? To help figure that out, I invite you to check out The Motley Fool's new premium research report on Bank of New York Mellon. Click here now to claim your copy.

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