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Updated to include comments made by Credit Suisse analyst Moshe Orenbuch on Wednesday, following a meeting with JPMorgan Chase CEO James Dimon, in which the analyst discusses the company's return of capital to investors.
NEW YORK (
TheStreet) -- While many of the largest U.S. banks are expected soon to announce dividend hikes,
TheStreet has identified
10 smaller profitable banks already paying out generous dividends to investors.
For investors seeking current income, the traditional route of high-quality corporate bonds, tax-exempt municipal bonds and preferred stocks may not cut it these days, with interest rates being stuck so low for so long. But some banks pay very attractive dividend yields on common stock, and careful investors who consider a company's long-term viability and capital strength may be able to lock in long-term cash cow.
With the Federal Reserve set to complete its stress tests and publicly announce the results next week, a slew of dividend hikes is expected during the second quarter.
Here's a quick roundup on what investors might be expecting for the "big four" U.S. bank holding companies, following the stress tests:
JPMorgan Chase (JPM - Get Report) is already paying a quarterly dividend of 25 cents, translating to an attractive a yield of 2.46%, based on Friday's closing price of $40.63. The dividend was increased from a nickel, last March. During 2011, the company's return of capital to investors also included $9 billion in stock buybacks.
During the company's Investor Day presentations last week JPMorgan Chase said its objective was to increase its dividend to a "30% payout ratio of normalized earnings over time." The company earned $4.48 a share during 2011. The consensus 2012 earnings estimate among analysts polled by Thomson Reuters is $4.68 a share, followed by estimated EPS of $5.44 in 2013. Looking at the 2013 estimate, a 30% dividend payout would be an annual dividend of $1.63. Of course, by that time the stock -- on Friday trading for just 1.3 times tangible book value, according to HighlineFI, and nine times the consensus 2012 EPS estimate -- seems likely to move higher, but for investors going in now, a 4% dividend yield on the original investment, over time, is quite reasonable.
Speaking about the company's overall plans for returning capital through dividends and buybacks, FBR analyst Paul Miller said last Thursday that "JPM clearly laid out that it has more than enough capital to meet the Fed's requirements for the stress test and Basel III, even if the company returns 50% of earnings back to shareholders." Miller also predicted that JPMorgan would raise its quarterly dividend by a nickel to 30 cents in the second quarter, "buy back approximately 50 million shares per quarter starting in 2Q12."
On Wednesday, Credit Suisse analyst Moshe Orenbuch said following a meeting with Dimon that JPMorgan's "capital levels are strong and management views the company as well positioned to both deploy capital, as well as meet Basel III minimums."
Orenbuch expects JPMorgan Chase "to be approved for incremental capital deployment activities," following the stress tests, and also expects "he company to reach 9.5% Basel III Tier 1 common equity during 2013, inclusive of continued share buyback." Achieving the full Basel III requirement at that early date "could ease some regulatory pressures and provide the company with some incremental flexibility around its capital priorities."
The analyst looks "for JPM to pursue a solid rate of capital return in 2012 at about 55% of total earnings in the form of dividends and buybacks."
Wells Fargo's (WFC - Get Report) current dividend yield is 1.54%, based on a quarterly payout of 12 cents and Friday's closing price of $31.28.
During the fourth quarter, the company repurchased 27 million common shares, with another 6 million in forward repurchases that were to settle during the first quarter.
Sterne Agee analyst Todd Hagerman said on Feb. 17 that coming out of the stress tests, "indications are that management will take a more measured and balanced approach to capital redeployment going forward, suggesting a bias towards dividends versus share buyback at current levels." Hagerman added that his "scaled-back capital distribution assumptions (35% total capital distribution for 2012 vs. 43% following 3Q11) reflect our expectations that buybacks will likely receive the most scrutiny, oversight, and control (hence the reduced buyback expectations for WFC next year)."
Credit Suisse analyst Moshe Orenbuch on Feb. 9 said that following the stress tests, he expected "an increase in the quarterly dividend to $0.22 per share," for Wells Fargo, along with " a share buyback program of $3 billion."
Citigroup (C - Get Report) is paying a token quarterly dividend of just a penny a share. Citi CFO John Gerspach said during a presentation at the Credit Suisse Financial Services Forum on Feb. 8 that "only $11 billion of our $51 billion in deferred tax assets is currently included in Tier 1 Common," and also that "math would suggest that about $24 billion of our regulatory capital should be eventually released as Citi Holdings winds down."
Citi Holdings is the subsidiary holding noncore assets that Citigroup is winding down as part of CEO Vikram Pandit's "good bank/bad bank" strategy of righting the company's balance sheet.
Consistent profits should allow the deferred tax assets recapture, and $64 billion in freed-up capital is, of course, a very significant figure. It's always fun to see what the big four say about each other, and Bank of America Merrill Lynch analyst Guy Moszkowski followed up on Gerspach's presentation on Feb. 8, saying that the freeing up of the $64 billion in excess capital "will take years."
While he expects "some capital return" during 2012, Moszkowski is quite enthusiastic on Citigroup, with a "Buy" rating and $44 price objective, which would be a 29% gain from Friday's closing price of $34.10.Bank of America (BAC - Get Report) is also paying a token penny dividend, and with the company's mortgage putback situation in flux, the Federal Reserve will have a tricky time approving a significant dividend increase this year.
Bank of America has been squabbling with
Fannie Mae (FNMA) over what the government-sponsored mortgage giant called a "failure to honor its contractual obligations in a timely manner."
In an apparently positive development for the company, the U.S. Court of Appeals for the Second Circuit on Feb. 27 issued a unanimous opinion that BofA's contested $8.5 billion settlement of Countrywide mortgage putback demands with private investors, should be decided upon, in New York State court.
Credit Suisse analyst Moshe Orenbuch said the decision was "a positive for Bank of America in that the settlement is more likely to be finalized according to its original terms," which were arrived at, last June. Since the settlement was "structured under New York State law," Bank of America can settle with the entire trust, rather than with individual investors. Bank of New York Mellon is the trustee that agreed to the original $8.5 billion settlement.
Assuming the settlement is finalized, one more piece of Bank of America's mortgage puzzle will be solved, and since the company already set aside the settlement money last June, one more barrier to a higher dividend payout will be removed.
Using data provided by HighlineFI, we pared down the list of highest-yielding bank and thrift stocks by only including names with average daily trading volume of over 30,000 that also showed positive returns on assets for each quarter during 2011.
This group, for the most part, has underperformed a hot banking sector this year. Then again, during a dismal 2011 for the entire banking sector, 7 of the ten saw single-digit declines, while maintaining or raising their dividend payouts, while the
KBW Bank Index (I:BKX) declined 24%.
Here is the
TheStreet's select list of
10 bank and thrift holding companies with high dividend yields :