We recently learned that all 23 banks that were subject to the 2021 stress tests passed with flying colors. And for the first time in the post-financial crisis era, banks have control over how much of their capital they want to use to pay dividends and buy back stock, as long as they maintain a certain level of capital.
So, it's not surprising that many big banks have recently announced planned dividend increases, and some have announced new buyback plans as well. With that in mind, here's a rundown of just how much of an increase that shareholders of five of the largest U.S. financial institutions can expect in the second half of the year.
Image source: Wells Fargo.
1. Bank of America
Based on the results of the stress tests, Bank of America (BAC +0.90%) decided to increase its quarterly dividend payment by 17% to $0.21 per share. Based on its current stock price, this translates to an annual dividend yield of just over 2%.
In addition, it's worth noting that although Bank of America didn't announce any new buyback activity as a result of the stress tests, the company approved a $25 billion buyback authorization earlier this year. At the current market cap, this implies that Bank of America is planning to buy back roughly 7% of its outstanding shares.
2. Wells Fargo
Wells Fargo (WFC +0.63%) was the only one of the big U.S. bank stocks that was forced to slash its dividend when the COVID-19 pandemic started, so it's fair to say that this dividend increase was widely expected. Wells Fargo expects to double its current (reduced) dividend payment to a quarterly rate of $0.20 per share. This translates to a yield of about 1.7%, which is still on the lower end as far as big banks go, but it's certainly a welcome development for income-seeking shareholders.
Furthermore, Wells Fargo plans to repurchase $18 billion in stock over the one-year period starting in the third quarter. This would be nearly 10% of the company's outstanding shares and is quite an aggressive buyback plan, so it appears that management thinks shares are a good value at the current price.
3. Goldman Sachs
Investment banking giant Goldman Sachs (GS +2.01%) decided to give investors one of the more generous dividend increases in the sector, boosting its quarterly payout by 60% from $1.25 to $2 per share. This gives the bank a 2.1% annual yield, which is historically a high payout for Goldman. Unlike some of its peers, however, Goldman did not announce anything related to its buyback plans.
4. JPMorgan Chase
The largest U.S. bank by market cap, JPMorgan Chase (JPM +1.81%) announced an 11% dividend increase to a quarterly payout of $1 per share. This gives the megabank a 2.6% annual yield, which is one of the highest in its peer group. However, JPMorgan didn't announce any increase to its buyback plan, simply confirming that its existing buyback authorization will continue to be available for use.
5. Morgan Stanley
This was certainly the most surprising of the five. While most investors weren't shocked that Wells Fargo decided to double its dividend, it's fair to say that it wasn't widely expected for Morgan Stanley (MS +2.17%) to do the same.
But that's exactly what happened. The bank doubled its quarterly payout to $0.70 per share, which gives the stock a yield of about 3.1%. What's more, Morgan Stanley also announced a plan to buy back as much as $12 billion of its own shares over the next four quarters.
Time to buy?
While nobody has a crystal ball that can predict exactly what will happen with these stocks, the signs all point toward a strong period for the banking industry. The elevated inflation we're seeing could lead to rising consumer interest rates, which would likely mean better net interest margins for banks. Now that all five of these banks are significantly better income generators for their investors and have the Fed's green light to use their excess capital as they see fit, they could be worth a closer look.
