Over the last few weeks, I've written about the capital allocation decisions made by a number of the nation's biggest banks, including US Bancorp (NYSE:USB) and Capital One Financial (NYSE:COF), among others.
In response to an article on Capital One, a reader sent me the following request:
You point out that [Capital One] returns 16% of earnings to shareholders. Since share buybacks (at 47%) reduces the total number of shares, increasing return for shareholders, isn't it true that [Capital One] currently returns 63% of earnings to shareholders?
With that point of view in mind, how about comparing the top 10 or 15 banks in terms of their trends over time to return capital to investors by combining returns in the form of both dividends and buy-backs?
This is a good point.
While the most direct way to return capital to shareholders is to pay a dividend, a second and equally valid method is to use excess earnings to repurchase shares of common stock. In certain instances, in fact, this is a more effective way to boost shareholder returns. If a bank's shares are trading at or near book value, then buying back stock immediately boosts the book value of the remaining shares outstanding.
I drew up the following chart with this in mind. It looks at the total amount of money returned to shareholders of eight leading regional lenders, including the aforementioned US Bancorp and Capital One, as well as others such as PNC Financial (NYSE:PNC), Fifth Third Bancorp (NASDAQ:FITB), and SunTrust Banks.
That US Bancorp, PNC Financial, and Capital One pay out more capital than the other five banks in the chart shouldn't come as a huge surprise, as they are the biggest banks on the list when measured by assets. Each has more than $300 billion in assets (US Bancorp has more than $400 billion) compared to the other banks which each have less than $200 billion.
To normalize for size, another way to think about this issue is to compare how much capital each bank returns to its shareholders on a per share basis compared to its share price. In PNC Financial's case, for instance, it has paid out $5.68 per share over the last 12 months. Meanwhile, its current share price is $91.97. Thus, the total yield to shareholders is 6.2% ($5.68/$91.97).
Measured in this way, the most generous regional bank in terms of the amount of capital it returns to shareholders is Ohio-based Fifth Third Bancorp. When you combine its dividend per share with the amount of stock it has bought back since the third quarter of last year, Fifth Third's total capital return yield was 7.6%.
In short, to the reader's point, there's much more to capital allocation than simply dividends.