BB&T Will Boost Buybacks, Not Dividends

A BB&T branch in Waycross, Georgia. Source: Wikimedia Commons.

The chief executive officer of BB&T (NYSE: BBT  ) recently announced that the bank is much more likely to boost buybacks next year as opposed to its quarterly dividend payout. "[Y]ou might think about us looking more positively toward buybacks as we head into 2014 relative to, say, the last two or three years," CEO Kelly King noted.

The issue of dividends versus buybacks is a hotly contested one. Company executives pitch it as a way to "return capital to shareholders." I, and others, have a different view -- and particularly when it comes to banks buying back their own stock.

A colossal waste of capital
It's no exaggeration to say that the last decade has been a veritable house of horrors when it comes to repurchase programs by the nation's leading lenders.

In the five years between (and including) 2003 and 2007, Bank of America (NYSE: BAC  ) spent $40 billion to repurchase 768 million shares of its common stock. One year later, its capital base was so depleted it needed $45 billion from the federal government just to survive.

And Citigroup (NYSE: C  ) put itself in a nearly identical situation. In the decade before the crisis, it bought back $41 billion of its own stock. By 2009, it too required a $45 billion taxpayer-funded bailout to stay afloat.

How can a similar fate be avoided?
This is an important question, and it's one that few analysts and commentators give enough attention to, choosing instead to simply co-op the management's talking points about the benefits of returning capital to shareholders.

The answer, it turns out, is straightforward. As I discussed here, in order for a buyback to be accretive to book value on an ongoing basis, a bank should generally avoid repurchasing stock when it's priced at a multiple to book value that exceeds its return on equity.

U.S. Bancorp (NYSE: USB  ) serves as a perfect example. The Minnesota-based lender is one of the best in the country and accordingly trades for a dear 1.96 times book value. Thus, in order for a buyback program to be accretive to its book value per share, its return on equity must be 96% or higher -- an impossible task even for an organization of U.S. Bancorp's caliber.

Getting back to BB&T
With these examples in mind, one would be excused for wondering why such an ostensibly shareholder-friendly bank such as BB&T would be even remotely interested in initiating a new buyback program given that its shares trade for 1.28 times book value versus a 9.2% return on equity over the last 12 months.

The answer is twofold. In the first case, given King's assessment of an overall "sluggish" economic environment, there are few places inside the operation to put the cash to work that would produce satisfactory returns on investment. And on top of this, there's nothing "imminent out there" on the mergers and acquisition front.

In the second case, since the financial crisis, banks have been reluctant to increase their dividend payouts if their payout ratio already exceeds 30%. According to the Federal Reserve, "Plans with dividend payouts greater than 30 percent of net income ... [receive] particularly close scrutiny."

At present, BB&T's payout ratio comes in at 46% -- well above the 30% threshold.

In sum, regardless of the reason, BB&T has effectively concluded that it's better to impair its own book value rather than face the heightened scrutiny from the Fed or to simply allow its accumulated earnings to gather dust in its capital account.

Is this the right decision? That remains to be seen, but I'm skeptical.

Don't miss out on the next big bank stock
Have you missed out on the massive gains in bank stocks over the past few years? There's good news: It's not too late. Bargains of a lifetime are still available, but you need to know where to look. The Motley Fool's new report "Finding the Next Bank Stock Home Run" will show you how and where to find these deals. It's completely free -- click here to get started.

Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 19, 2013, at 4:48 PM, pl2358 wrote:


    Did Kelly King actually state that BB&T is "much more likely to boost buybacks next year as opposed to its quarterly dividend" or even something close?

    I think not, and that is a very terrible spin on the comments by Kelly King.

    Kelly stated that the bank would look "MORE FAVORABLY" at share buybacks. He didn't say that the bank would be more likely to do either.

    Your stretch is too far based on his statement. Looking more favorably on something you haven't done much of in the past (buybacks) does not mean that you will not even do something else (pay an increased dividend).

    I would agree with you if you said that it would be likely that a dividend increase wouldn't match the last two increases' percentages, but to say that he said the bank would be less likely to make any increase is way past stretching the statements that were made.

    Terrible analysis. BBT prides themselves in paying a higher dividend. The fact that capital requirements may get more strict means that they may be able to afford less of an increase, but not forego the increase at all. And just because buybacks look better doesn't mean that some of the cash would be used for an increase.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2645334, ~/Articles/ArticleHandler.aspx, 9/27/2016 10:13:33 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 57 minutes ago Sponsored by:
DOW 18,228.30 133.47 0.74%
S&P 500 2,159.93 13.83 0.64%
NASD 5,305.71 48.22 0.92%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 4:00 PM
BAC $15.29 Up +0.20 +1.33%
Bank of America CAPS Rating: ****
BBT $37.40 Up +0.37 +1.00%
BB and T CAPS Rating: ****
C $46.37 Up +0.48 +1.05%
Citigroup CAPS Rating: ***
USB $42.90 Up +0.43 +1.01%
US Bancorp CAPS Rating: ****