5 Banks Set to Pay Investors From Jefferies

NEW YORK ( TheStreet) -- Jefferies analyst Ken Usdin on Wednesday highlighted five large bank holding companies "best equipped to pay out a higher percentage of earnings this year," following the completion of Federal Reserve stress tests.

With the Fed expected to publicly announce the stress tests results next Friday, Usdin expects "few surprises," believing that "the output will reflect a still cautious Fed that favors capital accumulation over deployment."

On average, the analyst forecasts "all-in payout ratios" -- including dividends and share buybacks -- "in the 40%-60% range, with a slight bias towards dividends."

Looking at dividends alone, Usdin said that "most banks seem content for now with dividend payout ratios of 20%-30% given Fed guidance that requests for more than 30% will be under increased scrutiny." During 2012, the analyst expects more banks to begin buying back shares, although "the overall impact to earnings should be fairly modest," because if "banks use 20%-30% of earnings for buybacks, share counts only move 2%-3% lower."

Banks likely to authorize share repurchases for 2012, according to Usdin, include Northern Trust ( NTRS), State Street ( STT) and U.S. Bancorp ( USB), while those less likely to buy back shares include Regions Financial ( RF), M&T Bank ( MTB), and Zions Bancorporation ( ZION) -- all of which have bigger fish to fry, since they still owe federal bailout funds received through the Troubled Assets Relief Program, or TARP -- and PNC Financial Services Group ( PNC), which just completed its acquisition of RBC Bank (USA).

For the three banks still owing TARP money, Usdin says that his "base case is that each bank will have to issue 20%-40% of TARP in common equity, but note that the recent company commentary tends toward the smaller side (if any)."

Regarding the general landscape for increased payouts of earnings during 2012, the analyst said that "With the average bank in our universe sitting on around 9% Basel III-adjusted Tier 1 common, it is hard not to make the argument that there is excess capital in the system."

All eyes will be on the Fed next Friday, for the expected public announcement of the stress test results. Usdin said that "public disclosure could raise some eyebrows," and that any variance with "current estimates for losses and pre-provision income will be closely watched, as investors decipher what it could mean for forward earnings projections."

Here's a quick look at the five large bank holding companies covered by Jefferies, that Usdin says are "best equipped to pay a higher percentage of earnings this year, sorted by ascending ratio of estimated total payout to earnings:

5. KeyCorp

Shares of KeyCorp of Cleveland closed at $7.62 Tuesday, down 1% year-to-date, following a 12% decline in 2011.

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Based on a quarterly payout of three cents, the shares have a current dividend yield of 1.51%.

Usdin estimates that KeyCorp will earn 70 cents a share during 2012, and raise its quarterly dividend by a penny to four cents, following the Federal Reserve's announcement, for a dividend payout ratio of 21% and an estimated dividend yield of 2.1%.

The analyst also forecasts that KeyCorp will repurchase 21 million common shares during 2012, for $168 million, for a combined dividend and repurchase payout ratio of 47%.

Usdin's price target for KeyCorp is $8.00.

The shares trade for just 0.9 times tangible book value, according to HighlineFI, and for 10 times the consensus 2012 earnings estimate of 77 cents a share. The consensus 2013 EPS estimate is 81 cents.

Interested in more on KeyCorp? See TheStreet Ratings' report card for this stock.

4. U.S. Bancorp

Shares of U.S. Bancorp of Minneapolis closed at $28.37 Tuesday, returning 5% year-to-date, following a 2% return during 2011.

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Based on a quarterly payout of 12.5 cents, the shares have a dividend yield of 1.76%.

Usdin estimates that U.S. Bancorp will earn $2.65 cents a share during 2012, and raise its quarterly dividend to 19 cents, for dividend payout ratio of 26% and an estimated dividend yield of 2.7%.

Jefferies forecasts that the company will buy back 48 million shares during 2012, for $1.45 billion, for a combined dividend and repurchase payout ratio of 55%.

Usdin's price target for USB is $30.00.

Reflecting its status as one of the strongest and most consistent earners among the largest U.S. bank holding companies -- with quarterly returns on average assets ranging between 1.51% and 1.61% during 2011 -- U.S. Bancorp's shares trade for 2.6 times tangible book value. The shares trade for 11 times the consensus 2012 EPS estimate of $2.68. The consensus 2013 EPS estimate is $2.91.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

3. Comerica

Shares of Comerica ( CMA) of Dallas closed at $28.55 Tuesday, returning 11% year-to-date, following last year's 38% decline.

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Based on a quarterly payout of 10 cents, the shares have a dividend yield of 1.36%.

Usdin estimates that Comerica will earn $2.40 cents a share during 2012, and raise its quarterly dividend by 50% to 15 cents, for dividend payout ratio of 24% and an estimated dividend yield of 2.1%.

Jefferies also expects Comerica to repurchase 6 million shares during 2012, for $166 million, for a combined dividend and repurchase payout ratio of 60%.

Usdin's price target for Comerica is $28.00.

Comerica's shares trade for a low 0.9 times tangible book value, and 12 times the consensus 2012 EPS estimate of $2.31. The consensus 2013 EPS estimate is $2.61.

Interested in more on Comerica? See TheStreet Ratings' report card for this stock.

2. Northern Trust

Shares of Northern Trust of Chicago closed at $43.49 Tuesday, returning 10% year-to-date, following a 27% decline in 2011.

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Based on a quarterly payout of 28 cents, the shares have a dividend yield of 2.58%.

Usdin estimates that Northern Trust will earn $2.94 cents a share during 2012, and let its quarterly dividend remain at 28 cents, for dividend payout ratio of 39% and an estimated dividend yield of 2.6%.

The analyst forecasts Northern Trust will repurchase 4 million shares during 2012, for $156 million, for a combined dividend and repurchase payout ratio of 62%.

Usdin's price target for Northern Trust is $45.00.

The shares trade for 1.8 times tangible book value, and 11 times the consensus 2012 EPS estimate of $3.90. The consensus 2013 EPS estimate is $4.55.

Interested in more on Northern Trust? See TheStreet Ratings' report card for this stock.

1. State Street

Shares of State Street of Boston closed at $40.92 Tuesday, returning 1.5% year-to-date, following a 4% return during 2011.

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Based on an 18-cent quarterly payout, the shares are currently yielding 1.72%.

Usdin estimates that State Street will earn $3.90 cents a share during 2012, and raise its quarterly dividend to 24 cents, for dividend payout ratio of 25% and an estimated dividend yield of 2.4%.

The analyst expects State Street to repurchase 21 million shares during 2012, for $1.0 billion, for a combined dividend and repurchase payout ratio of 78%.

Usdin's price target for State Street is $45.00.

The shares trade for 1.6 times tangible book value, and a rather high 15 times the consensus 2012 EPS estimate of $2.93. The consensus 2013 EPS estimate is $3.39.

State Street is very strongly capitalized, and estimated that as of Dec. 30, its Basel III Tier 1 common equity ratio was 12.1%.

Interested in more on State Street? See TheStreet Ratings' report card for this stock.

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>>To see these stocks in action, visit the 5 Banks Set to Pay Investors From Jefferies portfolio on Stockpickr.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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