Updated with comments on USB from KBW analyst Greg Ketron.
NEW YORK ( TheStreet) -- A common theme for bank stock investors in 2012 is the group's expected return of capital to investors, through share buybacks and/or dividend boosts following the completion of Federal Reserve stress tests in March, can support share prices that have recovered quite a bit so far this year.
While executives tend to prefer the "flexibility" of share buybacks when returning capital, many investors prefer just the opposite. A reasonable and steady dividend gives the investor a choice to reinvest or enjoy the income, and provides some support for share prices, as long as the market perceives that earnings are sufficient to support the continued payout.
Buybacks can backfire on occasion, as they did for JPMorgan Chase (JPM - Get Report) during the third quarter, when the company bought back $4.4 billion worth of common shares at an average price of $34.72.After the company reported its third-quarter results on Oct. 13, CEO James Dimon apologized to investors over the timing of the share buybacks, since the share price had declined significantly, closing at $33.20 the previous day. During the company's fourth-quarter earnings conference call, Dimon indicated a continued preference for buybacks, since JPMorgan Chase was trading below book value. Then again, investors might prefer to have a choice on whether or not to reinvest a juicier dividend, at today's low price multiples. Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock. Morgan Stanley analyst Betsy Graseck said on Monday that she expects all the banks covered by her firm "to hike dividends in 2012," with "median 44% total payout ratio in 2012," with some exceptions, including Regions Financial (RF - Get Report) and Bank of America (BAC - Get Report). Regions is in the midst of a transition in its business, with the pending sale of its Morgan Keegan subsidiary to Raymond James Financial (RF - Get Report), for "total consideration of $1.18 billion." The Birmingham, Ala., lender won't be in a position to return capital to investors any time soon, and depending on when the company chooses to request regulatory permission to repay the $3.5 billion in federal bailout funds it received through the Troubled Assets Relief Fund, or TARP, the company will be raising common equity through a public offering of shares. After the Morgan Keegan deal was announced on Jan. 11, Deutsche Bank analyst Matt O'Connor reiterated his "Buy" rating for Regions, with a $5 price target, and said that his earnings estimates included "the impact of $1b common issuance to repay TARP." O'Connor estimates that Regions will earn 44 cents a year in 2012. Interested in more on Regions Financial? See TheStreet Ratings' report card for this stock. Bank of America may also be one of the last of the large U.S. bank holding companies to see a significant dividend boost. The company was able to significantly boost its Basel I Tier 1 common equity ratio to 9.86% as of Dec. 31 from 8.60% the previous quarter, through continued asset sales, including shares of China Investment Bank, and the issuance of additional common shares and the retirement of some preferred shares and long-term debt during the fourth quarter, however, analysts have been lowering their earnings estimates for Bank of America, because of the company's reduction in earning assets. In light of the company's ongoing transition and the uncertainty over its ultimate exposure to mortgage putback claims springing from the disastrous purchase of Countrywide Financial in 2008, the Fed can be expected to show reluctance to approve a significant return of capital to investors, after rejecting Bank of America's capital plan following the 2011 stress tests. Interested in more on Bank of America? See TheStreet Ratings' report card for this stock. Moving on to the bank holding companies that appear primed and ready for dividend increases, TheStreet has identified five that have posted relatively strong earnings results over the past year, with fourth-quarter ratios of dividend payout to earnings of less than 30% during the fourth quarter, according to HighlineFI. We narrowed down the list to actively traded names with average daily trading volume of at least 50,000 shares, for which fourth-quarter data was available on Friday from HighlineFI. All five of these companies have achieved a return on average assets (ROA) of at least 0.95% for each of the past five quarters. These five names could all afford a significant dividend boost. Three of them need to wait until the Fed completes its stress tests. Here they are, counting down by forward price-to-earnings ratios: