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Behold! The Fed Raises the Curtain on Major Bank Dividends This Week

By Eric Volkman – Mar 24, 2014 at 5:00AM

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The Fed puts its stamp of approval -- or rejection -- on the capital allocation plans of the majors on Wednesday, which will be far and away the financial sector event of the week. Investors in star lenders Wells Fargo, Bank of America, Citigroup, and JPMorgan Chase will particularly be impacted by the decisions.

A mere four initials will be the talk of the banking sector over the coming days: CCAR. That stands for Comprehensive Capital Analysis and Review, and it'll be released Wednesday afternoon as a part of the Federal Reserve's stress tests for the nation's major financials. Arguably, it's the critical component, as it contains the Fed's approvals (or denials) of the banks' capital allocation plans. 

And by capital allocation plans, we're basically talking dividends (share buybacks, after all, aren't as exciting). As all but one of the 30 tested financials passed the tests, according to the Fed's first set of results last week, at least a few should get the nod for hikes in their distributions. This bodes well for the sector's stocks on an overall basis. Among the big four lenders, Wells Fargo (WFC) -- which, by the way, made its intentions very plain for a both a dividend and a share buyback raise  -- looks like it'll have the best chance of getting proposed increases green-lighted.

The prospects for other majors are cloudier, in spite of some good recent fundamentals. Both Citigroup (C 1.78%) and Bank of America (BAC 1.06%) conducted their own stress tests, estimating they would have significantly higher capital under the worst-case scenario than that projected by the Fed analysts. The regulator might read this as starry-eyed optimism, leading it to put the kibosh on any requested dividend or share buyback increase.   

On the subject of payouts and stress-tested banks, US Bancorp (USB 1.69%) is going ex-dividend on Thursday, the day after the CCAR is released. That quarterly distribution is $0.23 per share, for a yield of just over 2.1% on the company's most recent closing stock price.  By that day, of course, we'll know whether the bank has requested a raise in that amount, and whether the Fed assented to it. 

JPMorgan Chase (JPM 1.21%) will be a busy bank this week. In addition to adjusting to fallout from the CCAR, the company will reach (not too deeply) into its coffers to pay its latest legal settlement, a $218 million arrangement to resolve a class action suit over its alleged role in the activities of disgraced financier Bernie Madoff.

The firm will also probably speed-dial a headhunter or several, following media reports that its longtime chief executive for China investment banking, the wonderfully named Fang Fang, has decided to leave the company. Investment banking is a big component of the firm's operations and, needless to say, China is an enormous market, so this will surely have some impact. Morgan should try its best to find a qualified and well-connected replacement before the body gets too cold.

Outside of those developments, the market will also pay attention to the macro economy, which always affects the performance of the finance sector. Among the important numbers coming down the pike this week are new home sales for February (Tuesday), and the latest revision of Q4 GDP (Thursday).

Those figures are sandwiched in between Wednesday's CCAR release, which is almost certain to be the financial sector event of the week. Watch those dividends and share buybacks, folks, we're going to see some adjustments... hopefully of the upward variety. 

Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo, and owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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