It's been a long, tough ride for investors in Atlanta-based SunTrust (NYSE:STI) over the past couple of years. After a disastrous 2011, the bank started 2012 as one of the worst performers among the banks put to the Fed's stress test. Nevertheless, it finished the year strong, going into 2013 on a high note and hoping for better performance in the now two-part Fed stress test.
In this year's first test, the Dodd-Frank Stress Test (DFAST), SunTrust fared much better than last year, remaining well above the 5% minimum in Tier 1 common capital needed to pass. Thursday afternoon, the Fed released the results from the Comprehensive Capital Analysis and Review (CCAR), part two of the new-and-improved test. Shareholders of SunTrust should be pleased with the results:
Barely a blip
With the CCAR, a bank submits a plan to the Fed requesting a larger dividend or share repurchases to increase shareholder's returns. The Fed then runs the bank through a "doomsday" scenario to see whether the bank's Tier 1 capital ratio remains above the minimum. As you can see from the chart above, there was only a minor regression, with its capital plan not having much of an impact on the bank's important ratio, prompting the Fed to allow the bank to go ahead with its requested plan.
What was the plan?
Earlier this week, I suggested that SunTrust had plenty of room to grow its dividend, mostly thanks to its low payout ratio. The Fed has stated that a 30% payout ratio would be subject to "particularly close scrutiny," so SunTrust's 5.5% payout ratio was definitely OK. With that in mind, let's look at what SunTrust will be doing with its dividend:
After doubling its dividend, and based on the bank's projected earnings of $2.69 per share for 2013, SunTrust's new payout ratio of 14.9% is half of the Fed's ceiling. Furthermore, the bank is going beyond an increased dividend to return even more capital to shareholders:
Compared to regional banking leader U.S. Bancorp's $2.25 billion in share repurchase authorization, SunTrust's $200 million appears paltry, but keep in mind that it is the bank's first share repurchase since the doldrums of 2007.
Could this be the beginning of better things for SunTrust? CEO William H. Rogers, Jr. seems to think so, stating that the performance in the test "marks another step forward for SunTrust" and that the bank remains "committed to further improvements in our business performance and delivering long-term value to shareholders." We'll all have a better idea whether this is the case when the bank releases its first-quarter earnings next month, so feel free to add SunTrust to your Watchlist to keep an eye out for any news from the company.
Fool contributor Robert Eberhard has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.