3 Regional Bank Stocks Ready for a Dividend Boost

NEW YORK (TheStreet) - Following the next round of Federal Reserve stress tests for the nation's largest banks, three large regional players should finally provide some dividend relief to long-suffering investors.

Credit Suisse analyst Craig Siegenthaler late on Wednesday said in a report that "we expect aggregate capital deployment levels to increase by 63% in 2013" year-over-year, for the 17 regional banks covered by the firm. The increased capital return to investors will include a 28% year-over-year increase in dividends, as well as a 116% increase in buybacks, according to the analyst, who said his estimates "exclude capital deployment through net debt reductions and M&A."

While Siegenthaler's 2013 capital return estimates "are roughly in-line with sell-side forecasts (and we remain cautious on the industry)," he is expecting that company press release announcing divided increases and share repurchases "will have a modest net positive impact on the stocks in March '13 as income investors increase allocations to bank stocks."

Income-seeking investors, are of course, hard-pressed these days, with long-term interest rates at historical low, while the Federal Reserve does everything it can to keep them that way. Another consideration for investors considering bank dividend stocks is the buying opportunity following recent weakness in bank stocks, as investors fret over the election results and the uncertainty over the "fiscal cliff" continues.

The KBW Bank Index (I:BKX) declined 9% from Nov. 6 through Wednesday's close at 46.68.

There are three regional banks in particular that Siegenthaler expects to see a major payout boost in 2013, "which may add these stocks to more investor radar screens." With two having exited the Troubled Assets Relief Program, or TARP, this year, and one having its initial 2012 capital plan that included a dividend increase and share buybacks rejected by the Federal Reserve, the analyst "previously expected these banks to be the most cautious in their capital return requests." However, since the Fed's instructions for the 2013 capital plan submissions now include a "one-time adjustment" option for a large increase in payouts, Siegenthaler said "we now expect these banks to be more comfortable requesting a more normalized level of capital return in their initial submissions."

• Regions Financial (RF) of Birmingham, Ala., has gone through a major transition this year, as the company redeemed all $3.5 billion in TARP preferred shares during second quarter, after selling its Morgan Keegan subsidiary and raising $900 million in common equity during the first quarter. The company is currently paying a nominal quarterly dividend of a penny a share. Following the stress tests, Siegenthaler expects regions to increase its quarterly dividend payout to four cents a share, and for the company to buy back $249 million worth of shares during 2013. Shares of Regions Financial closed at $6.25 Wednesday, returning 46% year-to-date, following a 38% decline in 2011. If the quarterly payout were raised to four cents, the dividend yield based on Wednesday's closing price would be 2.56%.
• Zions Financial (ZION) of Salt Lake City in September, repaid its remaining $700 million in TARP preferred shares, having repaid $700 million in TARP money during the first quarter. The company is currently paying a quarterly dividend of a penny a share, and following the stress tests, Siegenthaler expects the dividend to be increased to seven cents, and for Zions to be approved to buy back $44 million in common shares during 2013. Zions has seen its stock return 19% year-to-date through Wednesday's close at $19.33, following a 33% decline last year. If the quarterly dividend were increased to seven cents, the shares would have a dividend yield of 1.45%.
• SunTrust (STI) of Atlanta had its initial 2012 capital plan rejected by the Federal Reserve, while the company's revised plan didn't include any increased capita return to investors. SunTrust in September took major steps to strengthen its balance sheet, including the sale of its stake in Coca-Cola, which resulted in a third-quarter pre-tax gain of $1.9 billion, as well as transferring about $3 billion in loans to held-for-sale, including some nonperforming loans. These actions and others led to lumpy third-quarter results that raised the company's Tier 1 common equity ratio to 9.80% as of Sept. 30, from 9.40% the previous quarter. SunTrust's shares closed at $25.44 Wednesday, returning 45% year-to-date. Following the stress tests, Siegenthaler expects the company to raise its quarterly dividend to 18 cents a share, which would make for a yield of 2.83% based on Wednesday's closing price. The analyst also expects SunTrust to receive approval to buy back $374 million worth of shares in 2013.

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