The super-regional bank Truist Financial (TFC 0.53%), which is the seventh-largest bank by assets in the U.S., has a dividend yield of nearly 6.3%.
That's quite healthy even in the current environment, where the Federal Reserve has hiked interest rates from practically zero at the beginning of 2022 to now close to 5%. This has enabled short-term, risk-free U.S. Treasury bills and certificates of deposits to yield 4% to 5%.
Let's take a look at how Truist has amassed such a large dividend yield and if it can sustain it moving forward.
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The banking crisis
Many banks have seen their share prices drop and their annual dividend yields rise thanks to the recent banking crisis. After SVB Financial's Silicon Valley Bank and Signature Bank collapsed in March and then Credit Suisse was forced into an acquisition, sentiment in the banking sector hit an all-time low, with many investors rattled and quite uncertain about the future.
The market began to scrutinize bank balance sheets much more intensely, examining unrealized bond losses, uninsured deposits, and how diverse bank deposit bases were. Truist has come under pressure because the bank was sitting on roughly $9.9 billion of unrealized bond losses at the end of 2022 that have not been accounted for in equity. With close to $24 billion of tangible common equity at the end of 2022, if Truist ever had to sell or mark down these bonds to cover deposit outflows, it would wipe out close to 42% of its tangible common equity.
Still, I believe this scenario is quite unlikely because Truist has a massive, diverse deposit base that caters to a wide range of industries and in a wide range of geographic locations, not to mention some of the fastest-growing markets in the country from a population growth standpoint.
However, that doesn't mean the bank won't face earnings challenges, because deposit costs have likely risen in a pretty material way in the first quarter of the year. As a large regional bank, Truist will also likely face headwinds from enhanced regulation that the sector may eventually face after this recent crisis.
Dividend sustainability
In the fourth quarter of 2022, Truist had a dividend payout ratio of about 40%, which is toward the higher end of the range bank stocks typically fall within (25% to 40% payout range), but certainly not too bad when you think about dividend stocks in general. For the year, the dividend payout ratio was about 47%.
Another way to check the sustainability of the dividend for bank stocks is to look at a bank's capital position. At the end of 2022, Truist had a common equity tier 1 (CET1) capital ratio, which looks at a bank's core capital expressed as a percentage of risk-weighted assets, of 9%. The bank's regulatory requirement is 7%, leaving it a very healthy buffer and plenty of room to return capital to shareholders.
Earlier this year, Truist sold a minority stake in its insurance subsidiary for roughly $1.95 billion, a move that is expected to have grown Truist's CET1 ratio to 9.3%. While I expect earnings this year to be challenged, I don't expect the bank to see its strong CET1 ratio eroded. Furthermore, the bank doesn't have excessive exposure to commercial real estate, which is another issue investors have recently been honing in on.
Can Truist keep paying its dividend?
Based on the fact that I do not expect Truist to experience a deposit run or have to sell securities, and the bank should maintain a strong CET1 ratio, I do think Truist can keep paying its strong 6.3% annual dividend yield.
I suppose that if earnings really take a hit over the next few quarters, the bank may consider pausing share repurchases or it may not be able to increase its dividend later this year. But ultimately, I think the main reason the annual dividend yield may decline is if Truist's share price eventually rebounds after things stabilize.
