With the year nearly finished, we can safely say that it was another large success for the long-term investor. Sure there were a few hiccups with the commodity-based sectors, such as gold and oil, whose components were under pressure for much of the latter half of the year. But for the most part, this year's double-digit rally in the S&P 500 was broad based.
Included in the group of outperformers was the Financial Select Sector SPDR ETF returning 16% year to date, modestly ahead of the S&P 500's cumulative return. This ETF is primarily made up of large money-center banks.
Why bank stocks rocked
Why have financial stocks outperformed in 2014? Two primary reasons: an advancing stock market compounded with 5% GDP growth in the third quarter continues to add confidence to businesses, and consumers who have been more willing to take on loans with lending rates still near record lows. The end result for the banking sector has been increasing profits and improved loan-portfolio quality.
One of the "side effects" of this growth has been an increase in bank stocks' share prices, as well as their dividends. Coming out of the 2008-2009 banking crisis, many banks had to hit the rewind button on their dividend payouts either by orders of the Federal Reserve via a bailout, or in order to conserve cash to navigate the choppy waters. More than five years removed from this mess, banks are once again able to reward faithful shareholders in a big way.
According to FactSet and its Dividend Quarterly report (link opens a PDF), six of the 10 sectors within the S&P 500 averaged a double-digit percentage increase in dividend-per-share payouts during the trailing 12-month period. Financials came in with the second-highest increase in year-over-year dividends per share, at 17.6%, trailing only the consumer discretionary sector, at 18.8%.
Three megabanks with megadividend increases
While there were plenty of outstanding dividend increases in the banking industry this year, three megabanks really stood out with dividend increases of 100%, 108%, and a whopping 400%! Let's take a closer look at what went right for these banking behemoths in 2014.
SunTrust Banks (NYSE:STI) -- 100% increase, to $0.20 per quarter
SunTrust Bank might not be a household name like Wells Fargo, but it's a $22 billion banking giant that received approval from the Federal Reserve this year to double its dividend, and return $450 million to shareholders in the form of a stock buyback.
What's working for SunTrust? It's a combination of factors that include declining expenses, improved credit quality of its loan portfolio, and growing deposits.
Based on the company's third-quarter earnings results, deposits grew 4% from Q3 2013, nonperforming loans dropped 25 basis points from Q3 2013 to 0.58%, and noninterest expenses plunged to $1.26 billion from $1.73 billion in the year-ago period.
More importantly, as Motley Fool Chief Financial Officer Ollen Douglas noted in an interview with SunTrust CEO Bill Rogers last month, SunTrust has seen a phenomenal transformation when it comes to customer interaction. Consumer loans have been up dramatically as SunTrust places its focus on going the extra mile for consumers in auto and home equity loans, in addition to mortgages. As long as lending rates continue to remain near record lows, it's likely SunTrust's strategy will keep paying off for shareholders.
Societe Generale (NASDAQOTH:SCGLY) -- 108% increase, to one euro per year
I didn't say these banking behemoths had to be located in the U.S. French banking giant Societe Generale announced a more than doubling of its dividend in February after the bank reported a year-over-year tripling in its 2013 profits, and improved capital ratios.
What's fueling Societe Generale's profit and dividend growth? Primarily, it's declining loan-loss provisions. In its latest quarter, the French bank noted a 1.9% increase in global banking and investor solutions revenue, which was offset by a 3.2% decline in its domestic retail business. The big difference was a 41% drop in the amount the bank set aside for potential losses, including litigation fees. With no major litigation fees to log last quarter, Societe Generale's profits soared 57%.
Europe certainly offers different challenges than we're facing in the U.S. A bank like Societe Generale's primary worry is weaker countries such as Greece, Portugal, and Spain. The EU needs to find a way to jump-start growth in these regions; otherwise, Societe Generale's long-term prospects could be choppy. However, the company's current focus on cost-cutting and shoring up its balance sheet is clearly beginning to pay dividends (excuse the deliberate pun).
Bank of America (NYSE:BAC) -- 400% increase to $0.05 per quarter
The crème de la crème of dividend increases this year came from Bank of America, which was given the OK by the Federal Reserve to raise its dividend for the first time in seven years. The move almost didn't happen, as accounting errors caused the Fed to redact its OK earlier in the year; however, the Federal Reserve did eventually give Bank of America the OK a few months later.
What's working for Bank of America? Simply, it's getting back to basics, and it could be nearing the finish line with regard to mortgage-related litigation.
Bank of America has been focusing less on the risk taking that got it into trouble during the Great Recession, and has instead focused on the backbone of banking: savings and loans. Bank of America reported in the third quarter that deposits were up $23.1 billion, or 4%, from the year-ago period, while credit quality for its loan portfolio continued to improve. Nonperforming loans dipped 56 basis points, to 1.61%, from Q3 2013, while the allowance for loan-and-lease losses fell 39 basis points, to 1.71%.
On top of getting back to basics, Wall Street and investors have to be thinking that Bank of America is getting near the finish line with regard to its mountain of legal battles stemming from the housing fallout. Bank of America has paid $61.2 billion in settlements since 2009; as a shareholder, I'm encouraged that the company is very close to putting these distractions in the rear-view mirror for good.
Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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