The results from annual bank stress tests were just released, and most of the 18 big banks that were subject to the tests are increasing their capital return to shareholders in the coming year.
And there were certainly some banks whose approved capital plans stood out from the pack. Goldman Sachs (NYSE:GS) is one of the most impressive, with a massive raise for shareholders and an equally impressive modification to its share buyback plan.
Positive stress test results
All 18 banks subjected to the 2019 Federal Reserve Comprehensive Capital Analysis and Review (CCAR), better known as the stress test, passed. This means that even in a severely adverse economic scenario, all of these large financial institutions would maintain adequate capital levels.
This is pretty impressive, considering that the Fed made its "severely adverse scenario" considerably worse than in previous years. The scenario assumes a six-percentage-point increase in the unemployment rate, a 50% plunge in the stock market, a 70% increase in volatility, a 25% decrease in home values, a 35% decrease in commercial real estate values, as well as recessions in other key areas around the world.
Is Goldman Sachs becoming a "dividend stock"?
Because Goldman Sachs passed by a significant margin, the Fed had no objections to its capital plan. And it is certainly stepping up its capital return. Starting with the third quarter of 2019, shareholders will be getting a massive 47% dividend raise, going from $0.85 to $1.25 per quarter.
Now, Goldman Sachs has never been much of a "dividend stock." For much of the past decade, its yield has been under 1.5%, barely touching 2% at one point during a major slide in the stock's price.
But the just-announced dividend increase translates to a yield of more than 2.5%, based on the share price as of this writing.
Goldman's buyback plan may be the bigger news
Besides the large dividend raise, Goldman Sachs also announced that the company's capital plan allows for as much as $7 billion of share repurchases from July 2019 through the end of June 2020. This is a 40% increase over the $5 billion authorized last year.
Let's be clear: This is an extremely aggressive stock buyback plan and is still subject to board approval and acceptable market conditions. Based on Goldman's current market value, a $7 billion buyback would translate to nearly 10% of the company's outstanding shares -- in one year.
It's also important to realize that out of the total planned capital return of $8.8 billion, almost 80% is in the form of buybacks. This shows that Goldman is convinced that its stock is attractively priced, and that buying back shares is the best use of capital. The stock currently trades for less than 95% of its book value, so it's not difficult to see why management might feel this way.
What it means to Goldman's investors
For investors, this is certainly welcome news. It shows that even with a dramatic increase in its capital return, Goldman Sachs would remain more than adequately capitalized in what would amount to a perfect economic storm.