After the banking crisis earlier this year, most bank stocks have been sold off, as investors reassess the landscape and await more clarity from an earnings and regulatory perspective. The sell-off has pushed up dividend yields, particularly among the stressed super-regional banking group, which includes banks with between $150 billion and $700 billion in assets.
If these banks can continue paying these dividends, that alone might make them worthy of investment. Let's take a look at which of these stocks has the best dividend from a payout and sustainability perspective.
Best yield and payout ratio
I'll start by looking simply at which of these super-regional banks has the most attractive dividend on yield and based on its payout ratio.
Data source: YCharts
As the chart shows, KeyCorp (KEY 0.62%) has the highest dividend yield right now, followed by Truist Financial (TFC 0.53%) and Citizens Financial Group (CFG 0.43%), although all of these are pretty attractive, yielding above 3%.
Data source: YCharts
In terms of payout ratio, Regions Financial (RF 0.05%) offers the lowest, leaving it the most potential room to raise the dividend, with Fifth Third Bancorp (FITB 0.22%) and M&T Bank (MTB -0.35%) offering the second- and third-lowest. With most of those in the group currently paying out 40% of their earnings, this is a little high for where the industry tends to fall, which is between the 25% and 40% range.
Bank earnings are also expected to face pressure in the near term, and bank capital requirements are expected to rise. Both factors could potentially put pressure on some of these dividends.
Looking at earnings and capital
Banks pay dividends with excess capital, typically that above their required Common Equity Tier 1 (CET1) capital ratio, which looks at a bank's core capital expressed as a percentage of its risk-weighted assets such as loans. So, the more excess capital a bank has, the more likely that bank can continue to cover and increase its dividend and repurchase stock.
In a recent article, I examined the capital positions of this bank group and also subtracted out a portion of unrealized losses in bank bond portfolios. I did this because unrealized losses have become a focus for investors after the banking crisis, and regulators are considering changing regulatory capital rules so the super-regional banks have to incorporate some of their unrealized losses into their regulatory capital ratios, such as the CET1 ratio.
In this article, I found that after subtracting a portion of the unrealized bond losses, Citizens had the most excess capital, followed by M&T and Regions. KeyCorp had the largest capital deficit, which may explain its large sell-off this year.
Then I also took a look at earnings estimates and revisions this year, because most companies try to cover their dividends with earnings.
Data source: YCharts
As you can see, M&T has seen the largest positive earnings revision this year, while KeyCorp has seen the largest revision downward.
Which super-regional bank has the best dividend?
While KeyCorp has the highest dividend yield, and while it may be able to continue to pay its dividend, I do not view it as the best in the group in terms of sustainability because there are scenarios that could force the bank to cut the dividend.
In my mind, the best dividend in the group is M&T Bank. It yields more than 4%, the payout ratio is toward the lower end of the group, the bank is in a good spot from an excess capital perspective, and it has also seen its earnings revised higher this year.
If you wanted to be a little riskier and take a chance on one of the higher-yielding dividends in the group, I would check out Truist or Citizens. Citizens has the highest excess capital position in the group. Although Truist has a capital deficit compared to its CET1 requirement when incorporating unrealized bond losses, the bank's capital position is better than it appears because it recently got close to $2 billion of fresh capital through the sale of a minority stake in its insurance business. Organic capital generation throughout the year should also help bolster Truist's capital position.
