Ohio-based Fifth Third Bancorp (NASDAQ: FITB ) experienced some mixed results last year after the Fed's stress test, despite its strong performance. Though the Fed felt the bank was well-capitalized enough to initiate some share-repurchases, Fifth Third was denied in its dividend increase request. Though it was later able to increase its dividend, other banks got to boost their payouts almost immediately.
In part one of this year's stress test, the Dodd-Frank Stress Test (DFAST), Fifth Third again exceeded the standard, with its Tier 1 common capital ratio only declining 1% after the Fed's tested "doomsday" scenario. While this result was pleasant news for Fifth Third investors, most were waiting for the release of the Comprehensive Capital Analysis and Review (CCAR) results, which would hopefully shed some light on the bank's ability to return capital to investors.
On Thursday afternoon, the Fed released the results, and Fifth Third investors should remain pleased:
Source: Comprehensive Capital Analysis and Review 2013: Assessment Framework and Results.
Just another 1% is all
With the CCAR, a bank submits a plan to the Fed requesting a larger return to shareholders in the form of a larger dividend or share repurchases. Fifth Third remained well above the minimum Tier 1 common capital ratio of 5% required to pass the test, proving that it can remain well-capitalized even it boosts its shareholders' returns.
What was the plan?
As I noted earlier this week, Fifth Third is already fairly close to the Fed's 30% payout ratio "ceiling," so there may not be that much room to increase its dividend. Nevertheless, the bank has requested a higher dividend, though the actual amount will be decided at a meeting of its board of directors in June. Nevertheless, most analysts expect the bank to raise its dividend by at least 20%, which would boost its annual dividend to $0.48 per share.
Source: Analyst projections; *Actual amount will be known after quarterly board meeting in June.
With projected earnings of $1.64 per share for 2013, this projected dividend increase would push the bank's payout ratio to 29%, right at the Fed's implied maximum. Investors will enjoy a dividend yield near 3% from a bank like Fifth Third, but the bank is planning on returning even more capital to shareholders in the form of share repurchases:
Source: Fifth Third Press Release.
Of this $1.7 billion, $750 million would be from the potential repurchase of trust preferred securities, which would be replaced by a similar amount of new debt. Another $984 million is part of a new authorization to repurchase common shares, which could potentially reduce the outstanding share count by over 50 million shares. This would result in common shareholders receiving a larger portion of per share earnings.
CEO Kevin Kabat stated the bank is focused on the multi-tier mission of returning capital to shareholders while "retaining more than sufficient capital to support ongoing business opportunities." To see what this means for the bank going forward, and to keep track of its looming dividend increase, feel free to add Fifth Third to your Watchlist today.
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