4 Dividend and Buyback Ready Bank Stocks (Update 1)

(Updated with additional analyst commentary on stress tests as a catalyst)

NEW YORK ( TheStreet) -- The next big catalyst for bank stocks is right around the corner.

The Federal Reserve will announce the results of the annual stress tests- officially known as CCAR(Comprehensive Capital Analysis and Review) on March 15. Analysts expect almost all of largest 19 banks to pass the test and most are expected to win approval to increase dividends and buybacks.

According to RBC Capital analyst Gerard Cassidy, Bank of America ( BAC) and Regions Financial ( RF) may be the only banks that do not increase dividends or buybacks in 2012.

Bank of America has said it has not requested an approval of any return of capital strategies, after the Fed rejected its request for a modest increase last year. Bank of America pays a penny per share in dividends every quarter.

Investor's concerns about the bank's capital adequacy have abated, after it reported a Tier 1 Common Capital ratio under Basel 1 being 9.86% in 2011.

"We've been for the last couple of years transforming the company," CEO Brian Moynihan told Reuters in an interview last week. "I think the market now realizes the progress we've made on that. Now it's all about, how do we drive the earnings going forward?"

Regions Financial, meanwhile, was unlikely to win the regulator's nod for more dividends or buybacks, as it still owes government bailout money, Cassidy noted.

Citigroup ( C) might see among the biggest increases to its dividend, according to the analyst's estimates.

The bank, which paid a penny a quarter for each share, is likely to win approval to return a substantial amount of capital in 2012, with strong capital levels under Basel 1 and two straight years of profits.

The bank may pay out as much as 40 cents per share in 2012, up ten-fold from 4 cents in 2011, according to RBC. That works out to a dividend payout ratio of 10%.

The consensus is somewhat lower; analysts on an average project the bank to pay something around the range of 31 cents per share.

While the upside is substantial, as a percentage of earnings, Citigroup is poised to payout only about 25% of its earnings in the form of dividends and buybacks.

Wells Fargo ( WFC), on the other hand, may pay out as much as 52% of its earnings in dividends and buybacks, Cassidy estimates.

Wells, with its strong capital and profitability levels, is well placed to return more capital to shareholders, although the bank has also been using capital to buy assets.

Consensus expects the large, regional bank to deploy more than a third of its earnings towards dividends or buybacks.

"Even after accounting for higher home equity losses, regional banks without TARP could pay out 50% of 2012 earnings and still clear the 5% tier 1 common bar," Bank of America Merrill Lynch analyst wrote in a report Tuesday. " That said, given the 34% rally in the BKX since its Oct' 11 trough, along with a wide range of buy- and sell-side expectations, we believe that it is far less likely that the stress test will be a positive catalyst for bank stocks - instead highlighting regulatory overhang and potentially muting or reversing the pace of the 2012 rally," she cautioned.

Here are four banks that are expected to have the highest payout ratio for dividends and buybacks combined, according to Cassidy. Note that while RBC Capital estimates banks' average combined payout ratio at 41%, consensus is generally lower at 33%.

4. Keycorp

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Keycorp ( KEY) may pay out close to 60% of its earnings in dividends and buybacks in 2012, according to RBC Capital estimates.

The dividend is expected to double from 12 cents in 2011 to 24 cents in 2012, giving the stock a forward dividend yield of 3%.

The bank may also use more than 30% of its earnings towards share repurchases worth $265 million.

Shares of Celeveland, Ohio-based are up about 3% year-to-date, underperforming the sector and broader indices.

"We believe that fair value for KEY is approximately book value, which would imply a $10 valuation. We recommend buying the stock at the current valuation given the recent consistent profitability, management expectations for stronger organic loan growth in future periods, and our belief that the company will effectively redistribute capital to shareholders in 2012," RBC analysts wrote in a report following earnings.

However, Stifel Nicolaus analyst Chris Mutsacio notes that the stress tests consider both capital and pre-tax, pre-provision earnings and that while Keycorp scores high on capital, it is relatively weak on the second measure and its payout ratio might not be as high as expected.

Fourteen analysts rate the stock a buy, 15 a hold and five analysts have an underperform or sell rating on the stock.

3. State Street

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Trust bank State Street ( STT) may also earmark 60% of its earnings towards dividends and buybacks in 2012, according to RBC Capital estimates.

The annual dividend is expected to climb from 72 cents in 2011 to 78 cents in 2012, as the bank steps up its dividend-payout ratio to 20%. On that estimate, the stock trades at a forward dividend yield of 1.9%.

The bank may, however, use more than 40% of its earnings towards a share repurchase program worth $765 million, according to Cassidy. On a combined basis, the stock trades at a forward yield of 5.6%.

The bank has a Tier 1 common capital of 16.9% under Basel 1.

Shares of State Street are up about 3% year-to-date, though shares have held up better than peers on a one-year basis, down only 5%.

15 analysts rate the stock a buy, seven a hold and one analyst has a sell rating on the stock.

2. Bank of New York Mellon

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Bank of New York Mellon ( BK) could see its annual dividend rise 8 cents to 60 cents per share in 2012.

The custody bank may also deploy 35% of its earnings to buy back 3.6% of its market cap or $970.5 million worth of shares in 2012, RBC Capital estimates.

Based on the expected combined payout ratio of 61%, the stock trades at a forward yield of 6.3%.

Bank of New York Mellon has very high capital levels of 13.4% under Basel I and 7.1% under Basel III.

Management expects to generate approximately 20-25 basis points of capital a quarter in Basel III Tier 1 common, including capital returned to shareholders.

Nine analysts rate the stock a buy, 12 have a neutral rating, while 2 analysts rate the stock an underperform or sell.

1. JPMorgan Chase

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

JPMorgan Chase ( JPM) is expected to have the highest combined payout ratio of 74% in 2012, according to Cassidy's estimates.

Dividend is expected to climb from $1 per share in 2011 to $1.12 per share in 2012, taking its dividend payout ratio to 24.7%.

In addition, the bank might spend as much as 50% of its earnings to buy back stock worth $8.5 billion.

The stock trades at a forward combined yield of 8.2% based on these estimates.

"JPM's combined payout ratio appears to be too high, but management presented its case at its investor day that it had the ability to raise the dividend and buy back roughly the same amount of stock that it repurchased in 2011," Cassidy wrote in his report.

JPMorgan said at its investor day last week that it expects to continue to deploy the capital remaining after dividends towards investments in organic growth, earmarking $1.9 billion in spending towards various growth initiatives. Acquisitions come next in priority, although given the current regulatory environment, deals are "reasonably unlikely", CFO Doug Braunstein said.

The bank expects to comfortably pass the Federal Reserve's stress test. Assuming analysts' estimated dividends and share repurchases consistent with 2011, Basel I Tier 1 Capital would still come in well over 8% in 2012 and 2013 under a stressed scenario, significantly above the 5% required by the Fed.

In other words, JPMorgan could generate as much as $35 billion in excess of the regulator's 5% minimum, the bank said.

28 analysts rate the stock a buy or outperform, while only three analysts rate the stock a hold. There are no sell ratings on the stock.

>>To see these stocks in action, visit the 4 Bank Stocks Ready for Dividends, Buybacks portfolio on Stockpickr.

--Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

>To follow the writer on Twitter, go to http://twitter.com/shavenk.

>To submit a news tip, send an email to: tips@thestreet.com.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.