A Dividend Deferred

Is a return to fat dividends becoming a distant dream for bank stock investors?
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) -- Is a return to fat dividends becoming a distant dream for bank stock investors?

Second-quarter earnings season is in full swing and several themes are emerging for the banks. Credit quality is showing meaningful improvement at many institutions. The

release of loan loss reserves

has begun and this should juice profits in coming quarters. Top-line growth is going to be hard to come by in a sluggish economy now that financial reform has passed. And any urgency to restore pre-crisis dividend payouts is being replaced by contentment to stockpile excess cash or use it for buybacks.

Banks including

JPMorgan Chase

(JPM) - Get Report


Wells Fargo

(WFC) - Get Report


U.S. Bancorp

(USB) - Get Report



(CMA) - Get Report

-- all of which have repaid government bailout funds -- noted on their conference calls this week they've put the brakes on dividend boosts.

Bank stocks historically appealed to investors because of their high dividend yields and stability as opposed to technology stocks, for example. Then the financial crisis hit and those banks that took government bailout assistance were forced to slash their dividends to minimal, if any, payouts. Most banks have yet to return to their historical payout ratios because they have either not repaid federal bailout funds, they are waiting for more clarity on the economic recovery and future


standards, or regulators have yet to sign off on a dividend hike.

And while there is a growing sense that regulators will weigh in on capital standards by early next year, some observers are doubtful that the high dividend yields of yore will ever come back, especially as companies (both within and outside of the financial sector) re-think how they return capital to shareholders with many turning to buybacks instead.

"For some banking companies, particularly as their earnings come back, they are going to be in a situation where their

return on equity is far greater than their balance sheet growth rates," therefore facing a situation of what to do with the build up of excess capital, says bank consultant Bert Ely.

Banks that had to slice their dividends to virtually zero are "probably doing more critical thinking about 'What is the best way to maximize returns to shareholders?'," Ely says.

Bob Profusek, a partner and global chair of M&A at Jones Day, expects the modest move towards buybacks already evidenced in the second quarter to pick up in the third quarter.

Another reason that companies are leaning towards buybacks as opposed to dividends is the coming change in tax treatment of dividends that begins in 2011, Profusek says. The payouts will be taxed at a much higher rate than the current 15%, he says. And if talk that dividends should be taxed at even higher normal ordinary income rates comes to fruition, Profusek thinks dividends could all but disappear.

More on Dividends 10 Bank Stocks With Solid Dividends

Still for any financial firm willing to implement a share repurchase program, it is sending the message that they are "pretty comfortable that their assets are cleaned up and properly reserved," Profusek says. "So if that's the case, why sit on the cash if you're balance sheet is clean?"

Goldman Sachs

(GS) - Get Report

was one of the few financial firms to buy back shares in the first quarter. And while the company did not make any share repurchases in the second quarter, CFO David Viniar said on a conference call this week that further buybacks will depend on the environment.

Last week,

JPMorgan Chase (JPM) - Get Report

disclosed it recently repurchased $500 million worth of its common stock.

Chairman and CEO Jamie Dimon said he is more inclined to do share buybacks these days as a "smart" shareholder move, while raising the dividend is now more likely to come in early 2011.

"There are a lot of uncertainties around capital," Dimon said on the call. "As those uncertainties are resolved, when they do, we will have plenty of capital and that capital number is going to grow even faster over time, not slower as reserves come down, et cetera. ... We are getting capital heavy, we are buying back a little bit of stock. When we start the dividend, we want to be permanent."

For now, at most other companies, neither dividend raises or buybacks seem to be imminent.

Comerica, for example, repaid its federal bailout funds earlier this year and recorded a second-quarter profit that beat Wall Street expectations, yet CEO Ralph Babb is still cautious.

"We would like to see more stability

in the economy as well as stability in job growth going forward as well the continued increase in our core profitability, and we will monitor that as it moves along before we make a recommendation either on dividend or buyback," Babb said on the conference call.

Since loan growth has been minimal, many banks are looking to pick through the pieces of remaining assets and banks held by the

Federal Deposit Insurance Corp.

, says Peter Sorrentino, a senior portfolio manager at Huntington Funds.

"They're going to want to take a real close look at overlooked bargains to get revenue and profit growth back on track, but at the end of the day if they can't find anything like that then they'll do something for the shareholder," Sorrentino says.

Still other banks say they are just waiting for the green light to return dividends to shareholders.

John Stumpf, the chairman and chief executive of Wells Fargo as well as U.S. Bancorp's CEO Richard Davis both acknowledged in their respective conference calls that higher dividends are a priority, but regulators and the unknown future capital requirements are holding them back.

"Our Tier 1 common now is as high as it has ever been," Wells Fargo's Stumpf said during the bank's conference call with analysts. "We are generating it at very rapid speed. And, frankly, it's time we start rewarding our owners, our stockholders with a more representative dividend given the performance of this company. And that is job one around here. We want to get that done."

Banks and regulators may be waiting for evidence of a sustained economic recovery, but U.S. Bancorp's Davis believes the final word that comes down in November from the G-20 may be more important. Once the international capital standards are set, Davis said "we'll start giving guidance on what kind of capital levels we need to look for in a certain period of time, measure those against the stress test and get permission to go or no go."

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.