Regions Financial (NYSE:RF), an Alabama-based bank with $144 billion in assets, is expected to have a much better third quarter than it did last quarter when the bank reported a $237 million loss, or negative $0.25 in earnings per share (EPS). The average estimate among 23 analysts for Regions' Q3 earnings report (expected on Oct. 20), according to Yahoo! Finance, is $0.32 EPS. The consensus on Zacks Investment Research is $0.33 EPS among 11 analysts.
But I think this regional banking operation will be able to generate earnings toward the higher end of what analysts are projecting. Why? Because management has expressed confidence in its ability to continue paying its normal dividend. To do that under current regulations, it would have to do better than a $0.33 EPS.
Let me explain.
The dividend calculation
Like it did in the third quarter, the Federal Reserve has capped dividends for larger banks to the average net income of the trailing four quarters. That means the bank's ability to pay its normal dividend is heavily dependent on earnings.
Last quarter, Regions paid out a common dividend of roughly $149 million to shareholders ($0.155 per-share dividend times 960 million shares) and preferred dividends of $23 million, for a total quarterly dividend payment of $172 million. So, to cover this, the bank must have a trailing four-quarter average net income of $172 million or higher.
|Fourth-quarter 2019||$389 million|
|First-quarter 2020||$162 million|
|Second-quarter 2020||($214 million)|
|Third-quarter 2020 (projected)||$350 million|
|Average net income||$171.75 million
Regions would have to generate roughly $350 million in net income to cover both the preferred and common dividends it paid in the second quarter, assuming outstanding shares stay the same at 960 million. The $350 million in net income is roughly $0.36 earnings per share ($350 million divided by 960 shares), and as you can see above, $350 million just barely covers the dividend, so earnings could very well be higher.
Management expressed confidence that it would be able to maintain its normal dividend on its second-quarter earnings call. Then it did so again at the Barclays Global Financial Services Conference in September. "And so based on our forecast, we feel comfortable we're going to continue to be able to pay the dividend at the rate that we have today. And so we're -- we haven't changed our conviction on that," Regions CFO David Jackson Turner said at the conference.
The only area for concern is that, despite a bad second quarter, Regions generated revenue of roughly $1.5 billion, the highest quarterly revenue it has generated in the last year -- yet most banks are expecting to see lower revenue due to the low-interest-rate environment setting in. The good news is that after setting aside $882 million for future potential loan losses in the second quarter, Regions President and CEO John M. Turner said at the Barclays Conference that he feels the bank is "well reserved." That means the bank should have a much smaller credit provision in the third quarter, which should help offset any decline in revenue.
Given what we know about the Fed's dividend restrictions and Regions' normal dividend, we know the bank would have to generate at least $350 million in earnings, or about $0.36 earnings per share, which is currently above the consensus estimate. I don't think management would say as recently as September that they feel good about maintaining the banks' current dividend if they didn't mean it. To do so without some proper cause could anger potential investors and spark potential regulatory scrutiny.