The banking sector hasn't been an investor favorite so far in 2016. There are numerous reasons for this: interest rates that are still teasing historical lows, there are still concerns about the global economic fallout from the Brexit vote, etc., etc.
Yet numerous banks are thriving. All of the banks subject to the Federal Reserve's stress test passed this year, showing that they're generally in good financial health.
Image source: Getty Images.
No wonder the Federal Reserve approved nearly every one of their capital allocation plans. These, of course, almost always include dividends -- and in some cases, substantially higher ones than they had been paying. Here is a look at some of the more meaningful distribution raises from the nation's lenders.
The big boys open their wallets
The Fed's latest approvals came as sweet relief for Bank of America (BAC +0.55%) and Citigroup (C 0.24%). These two financial crisis-era disasters required the heftiest bailouts from the government's TARP assistance program, and consequently kept their dividends low for years.
With quarterly dividends of $0.54 and $0.64 per share, respectively, Citigroup and Bank of America were both flying high before the crash. Both tumbled far and fast to $0.01 in 2009, finally getting a lift years later to $0.05 per share.
With the Fed's latest nod, Citigroup was able to more than triple this to $0.16. It has also effectively been granted permission for a share repurchase program totaling $8.6 billion.
| Dividend per shae | |||||||
| Bank | Upcoming | Current | Increase (%) | Record date | Payment date | Yield on upcoming (%) | Buyback ($mn) |
| Citigroup | $0.16 | $0.05 | 220 | Aug. 1 | Aug. 26 | 1.5 | 8,600 |
| Bank of America | $0.075 * | $0.05 | 50 | n/a | n/a | 2.1 | 5,000 |
| Morgan Stanley | $0.20 | $0.15 | 33 | July 29 | Aug. 15 | 2.7 | 3,500 |
* proposed
Data source: Companies mentioned, Yahoo! Finance.
The Fed has signed off on a new Bank of America quarterly payout of nearly $0.08 per share, although this hasn't yet been formally declared by the bank. The Fed also granted the company's proposed share buyback program of up to $5 billion.
Finally among the big-cap, big-raiser crowd, we have Morgan Stanley (MS 0.04%). It was one of the (relatively) cheap TARP rescues; as such, it didn't have to chop its quarterly dividend as much. From a crisis-era low of $0.05 per share, Morgan Stanley's rose in stages to $0.15.
After the bank passed its 2016 stress test (although the Fed required it to submit an additional capital plan to address certain concerns), that'll get another boost to $0.20. That's to be accompanied by up to $3.5 billion in stock buybacks.
The smaller fry get in on the action
Why should the smaller and regional banks miss out on the dividend raise wave? Several of the market's more under-the-radar, regional/specialty lenders are joining the party.
| Dividend p.s. | |||||||
| Bank | Upcoming | Current | Increase (%) | Record date | Payment date | Yield on upcoming (%) | Buyback ($mn) |
| Zions Bancorp. | $0.08 | $0.06 | 33 | Aug. 18 |
Aug. 25 | 1.2 | 45 * |
| Bank of NY Mellon | $0.19 | $0.17 | 12 | Aug. 2 | Aug. 12 | 1.9 | 2,700 |
| Ally Financial | $0.08 | n/a | n/a | July 29 | Aug. 15 | 2.7 | 700 |
* Q3 only
Data source: Companies mentioned, Yahoo! Finance.
Most notable among these is Utah-based Zions Bancorporation (ZION +0.47%), which is lifting its quarterly payout by 33% to $0.08 per share. It's also spending money to buy back its own shares, to the tune of $45 million in Q3.
On the opposite side of the country, niche lender Bank of New York Mellon, which specializes in custodial services, is also enacting a double-digit raise. Its quarterly dividend will increase from $0.17 to $0.19 per share. On top of that, the company will soon launch a one-year, $2.7 billion share repurchase program.
Honorable mention goes to Ally Financial (ALLY +0.32%), the phoenix-from-the-ashes auto loan specialist that nearly flamed out during the crisis (when it was known as GMAC Financial Services).
Since its 2010 rebranding, the company has never paid a dividend. That'll change in August, when it starts to dispense an $0.08 per share quarterly payout. The company will also launch a comparatively modest $700 million repurchase program that is set to run for a year.
Banking on fundamentals
Ironically, given that it specializes in the distribution of money, the banking sector has never been particularly generous with its dividends.
Despite some of these big-percentage hikes, that's not going to change much. Exactly half of the banks mentioned above have theoretical yields below the current 2.1% average of dividend-paying stocks on the S&P 500.
So investors shouldn't flock to any of these stock solely because of a fat percentage raise, or a ten-figure share buyback initiative. As ever, anyone interested in the banking sector should be selective and discerning largely on the basis of fundamentals.
Of the six banks covered, I'm particularly drawn to Bank of America.
Like Citigroup (but not Morgan Stanley), Bank of America trades at a very attractive discount to its book value, but it's not as heavily exposed to markets abroad -- a particular concern given the enduring sluggishness of the European economy, not to mention the fallout from Brexit.
As for the smaller fish, I'd be wary of Zions Bancorporation because of its relatively heavy dependence on net interest income. Meanwhile Bank of New York Mellon is pricey for what I consider to be a fairly mature business that doesn't have enormous potential for growth.
Ally Financial could be an intriguing buy. Despite losing much of its key auto-loan business due to General Motors' recent decision to bring its lending in-house, the company has recovered by bulking up in other segments.
For instance, earlier this year it bought TradeKing, which has a chunk of its business devoted to wealth management, typically a very high-margin activity for banks.
