Bank stocks saw a nice boost late last month after the results of the Federal Reserve's annual stress test were published. The Fed has the power to block banks operating in the U.S. from increasing their dividends if they fail to meet the test's standards. Two noteworthy banks not only passed, but were also approved for double-digit dividend increases and massive share repurchases. Those banks were Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM).
Both of these banks' updated capital return programs reinforce why dividend investors may want to consider adding these stocks to their portfolios if they haven't already. Sure, other major banks announced meaningful increases to their capital return programs and dividends, too. But Wells Fargo and JPMorgan are two of the largest banks in America with both low payout ratios and strong operational performance. As such, their recent dividend increases and updated share repurchase programs are worth a closer look.
Some investors might shun the idea of investing in Wells Fargo after the company's poorly designed incentive programs created a culture that often failed to put the customer first and even led to fraudulent behavior, including the opening of millions of unauthorized accounts. Also worrisome: the Fed has put a cap on the company's assets, limiting them to $1.95 trillion until the bank "sufficiently improves its governance and controls," the Fed said earlier this year (via Reuters). But the company's ongoing efforts to rebuild trust with stakeholders and to improve its compliance and operational risk management programs could pay dividends for patient investors, as transformations like this take time.
Meanwhile, the stock's suppressed valuation, thanks to the stock's 8% decline year-to-date, gives investors an opportunity to buy a bank with superior economics and risk management at a good price. Wells Fargo's price-to-book ratio has declined from about 1.7 to 1.5 since Jan. 1. In addition, Wells Fargo is giving its share repurchase program a significant boost at the opportune time -- a move that could help earnings-per-share growth accelerate as the bank repurchases shares at a discount. Wells Fargo was approved to repurchase up to $24.5 billion worth of its own stock through the third quarter of 2018 to the end of the second quarter of 2019 -- more than double the $11.5 billion that Wells Fargo's plan included in the last 12 months.
Of course, even if investors have to wait to see the fruits of the company's efforts to reinvigorate its culture with an ethical foundation, they don't have to wait to profit from Wells Fargo stock. In the meantime, they can enjoy the banks nicely growing dividend.
With its just-announced dividend increase, Wells Fargo extends its recent track record of strong dividend growth. Over the past five years, Wells Fargo's dividend has increased at an average rate of 25.8% annually. This year, it plans to increase its quarterly dividend from $0.39 to $0.43, or 10.3%. Though the expected increase is below Wells Fargo's average annual dividend growth over the last five years, it's a meaningful uptick from last year's 2.6% dividend increase.
This double-digit dividend increase will give Wells Fargo a strong forward dividend yield of 3%, well above the 2% average yield of stocks in the S&P 500, and easily beating savings account yields.
The approval of Wells Fargo's significantly accelerated capital return program "demonstrates the strength of our diversified business model, our sound financial risk management practices, and our strong capital position," CEO Tim Sloan said in a press release about the capital plan.
JPMorgan's planned third-quarter dividend increase is particularly impressive. The company expects to increase its quarterly dividend from $0.56 to $0.80, or 43%. This increase is up sharply from JPMorgan's 12% dividend increase last year. After the increase, JPMorgan has a forward dividend yield of 3% -- equal to Wells Fargo's.
In conjunction with the announcement of its plans for a 43% dividend increase, JPMorgan said it plans to repurchase up to $20.7 billion of its own stock between July 1, 2018, and June 30, 2019. JPMorgan's repurchase program is slightly higher than its $19.4 billion repurchase program during the last 12 months.
"The quality of the company's capital, liquidity and control environment positions the firm well for varying economic scenarios while maintaining the ability to sustainably deliver value to our customers and investors," CEO Jamie Dimon said about the company's updated capital return program in a press release.
Expect more dividend growth
Looking ahead, there's likely more dividend growth to come for both banks.
Wells Fargo and JPMorgan have low payout ratios (the percentage of earnings currently being paid in dividends). Wells Fargo's payout ratio is about 39%; JPMorgan has a payout ratio of just 31%. This means even moderate earnings growth at both banks could easily support meaningful dividend growth for years to come.
In addition, Wells Fargo and JPMorgan have shown their operational prowess by increasing their book value per share nicely in recent years. JPMorgan's book value per share has increased about 13% since the end of 2015, and Wells Fargo's has increased about 9% during the same period.
Finally, both companies impressive return on equity ratios --12.2% for Wells Fargo and 11.6% for JPMorgan -- position them to continue generating excess cash to repurchase shares in droves, helping support earnings and dividend growth on a per share basis.
While investors should expect volatility in dividend growth on a year-to-year basis given the highly regulated nature of the banking industry, Wells Fargo and JPMorgan look poised to support material dividend growth over the long haul despite their already attractive dividend yields.