The changes that the Federal Reserve made to its annual stress tests worked out very well for American Express (NYSE:AXP), which announced late yesterday that the Fed had approved its plan to return capital to investors.
The new format instituted by the Federal Reserve this year, whereby the stress test results and the Comprehensive Capital Analysis and Review scores were released separately, worked out well for American Express. That's because it was able to obtain feedback from the Fed back in January regarding its capital plan -- which, as it turned out, was a non-starter. Being able to submit an amended plan enabled AmEx to get a passing grade of 6.4% for its post-super-stress scenario, compared to the 4.97% it would have gotten without the early heads-up.
Now, AmEx is able to present its shareholders with a nice dividend increase, 3% higher than last years' hike:
As well as a not-quite-as-hefty, but still sweet, share repurchase program:
A second chance for investors, too
As the Fed found out last year, tweaks to capital plans caused quite a bit of upheaval for financial institutions, which had to wait months to see if their revised plans passed muster. Last year, SunTrust (NYSE:STI), Fifth Third Bancorp (NASDAQ:FITB), and Citigroup (NYSE:C) all had their capital plans rejected, and had to resubmit. Fifth Third was later able to boost its dividend in September, by 25%, unlike the other two banks.
SunTrust, which had been expected to pass all aspects of the testing after paying off its Troubled Asset Relief Program balance, wasn't punished by investors, and actually saw an upward tick in its share price immediately after the results were announced in March. For Citigroup, however, the news was dire, particularly for then-CEO Vikram Pandit, whose ousting last fall has been traced by many analysts to that capital plan failure in the spring.
Still a little stingy?
For investors who were hoping that American Express would be more generous with capital returns, this news might smart a little. However, I think AmEx is being cautious because of its having to submit the alternate plan when the first one didn't fly. Better safe than sorry, as they say.
Investors needn't worry about the company's prospects. American Express is currently trimming its expenses, even after reporting higher-than-estimated earnings for the fourth quarter. With the economy looking brighter this year, I think it's a sure bet that American Express won't be letting its investors down.