The Federal Reserve gave the country's largest banks a passing grade on its annual stress test last week, and they wasted little time turning it into cash for shareholders. The results, released June 24, showed all 32 of the lenders the central bank examined staying above their minimum capital requirements -- even in a hypothetical recession severe enough to saddle the group with more than $708 billion in loan losses. Within hours, the biggest names began rolling out dividend increases and share buybacks.
The question for investors is which bank delivered the most, and whether the wave of payouts points to genuine strength across the group. Answering it means looking past the size of each payout to the stress capital buffer (SCB) behind it -- the extra cushion of capital the Fed makes each bank hold on top of the minimum, determined in part based on stress-test results and set at no less than 2.5%.
Image source: Getty Images.
JPMorgan Chase
JPMorgan Chase (JPM +0.00%), the largest U.S. bank by assets, announced the biggest buyback authorization of the group.
It intends to raise its quarterly dividend 10% to $1.65 per share in the third quarter, and its board authorized a new $50 billion stock buyback that takes effect July 1. That single program is worth about 6% of JPMorgan's roughly $880 billion market value.
NYSE: JPM
Key Data Points
The bank can be this aggressive because the Fed asks it to hold very little extra capital. Its SCB sits at 2.5% -- the lowest level the regulator allows -- and its current standardized common equity tier 1 capital ratio requirement, including regulatory buffers, is 11.5%.
Goldman Sachs
Goldman Sachs (GS -1.01%) leaned on its dividend rather than a headline buyback number. The investment bank plans to raise its quarterly payout by 11% to $5.00 per share -- 25% higher than it paid a year ago. Few large banks have grown their dividend that quickly.
Goldman carries a higher buffer than JPMorgan, at 3.4%. That largely reflects its greater reliance on trading and market businesses, which tend to produce larger modeled losses under the Fed's severe scenario.
NYSE: GS
Key Data Points
Morgan Stanley
Morgan Stanley (MS -0.06%) delivered the biggest percentage dividend increase of the four, raising its quarterly payout 15% to $1.15 per share and reauthorizing a multi-year buyback of up to $20 billion. It did so even though it holds the highest SCB of this group, at 4.3% -- again a reflection of the larger losses the Fed models for its trading-heavy business.
It can still afford to be generous. Morgan Stanley's common equity tier 1 ratio (a core measure of a bank's capital strength) stood at 15.1% at the end of March, well above the 11.8% required by the regulator.
NYSE: MS
Key Data Points
Wells Fargo
Wells Fargo (WFC +1.23%) rounded out the group with an 11% dividend increase, to $0.50 per share, and said it has the capacity to keep buying back stock. Like JPMorgan, it operates with an SCB at the 2.5% floor, putting it among the banks the Fed treats as needing the least extra cushion.
Wells Fargo is also the cheapest of the four. The stock trades at a price-to-earnings ratio of about 13, against about 16 for JPMorgan and roughly 19 for both Goldman Sachs and Morgan Stanley. And after the latest raise, it offers the group's highest dividend yield, at about 2.4%.
NYSE: WFC
Key Data Points
Is the payout wave a green light?
Taken together, the announcements are a strong vote of confidence. Each of these banks announced higher dividends, and JPMorgan and Morgan Stanley also announced large buyback authorizations, while the Fed's decision to leave these banks' buffers unchanged gives them room to do so without bumping up against regulatory limits. The test itself showed that even a severe hypothetical downturn wouldn't drag the group below its minimums.
But a bigger payout doesn't automatically make a stock a buy.
JPMorgan announced the biggest buyback authorization, and Morgan Stanley raised its dividend the most, yet both trade at premiums to the group on a price-to-earnings basis. For investors weighing what they pay against what they get back, Wells Fargo's mix of the lowest valuation, the highest yield, and a buffer already at the Fed's floor arguably stands out.
