Continued strong performance leads to eventual gains for investors, even though the banks have been forced to build up higher levels of capital in the wake of the credit crisis. The completion of this year's Federal Reserve stress tests led to regulatory approval for significant dividend increases and significant share buybacks for Wells Fargo, JPMorgan and U.S. Bancorp:
  • Wells Fargo was approved to raise its quarterly dividend to 30 cents a share in the second quarter from 25 cents, subject to approval by the company's board of directors. The 30-cent quarterly payout would equate to a dividend yield of 3.24%, based on Monday's closing price of $37.02. The company was also approved by the Fed for "a proposed increase in common stock repurchase activity for 2013 compared with 2012." Wells Fargo's share buybacks during 2012 totaled $3.9 billion.
  • JPMorgan Chase received only conditional approval for its 2013 capital plan, being forced by the Federal Reserve to submit a revised plan by the end of the third quarter. Nonetheless, the company was approved by the regulator to raise its quarterly dividend to 38 cents form 30 cents, making for a yield of 3.13%, based on Monday's closing price of $48.58. JPMorgan also received Federal Reserve approval for up to $6 billion in common-share buybacks through the first quarter of 2014.
  • U.S. Bancorp was approved by the Fed to raise its quarterly dividend to 23 cents a share from 19.5 cents. The shares have a dividend yield of 2.73%, based on the higher payout and Monday's closing price of $33.69. The company was also approved for share repurchases of up to $2.25 billion through the first quarter of 2014.

Significant buybacks, year after year, lead to a reduced share count and which lead to higher earnings-per-share, not to mention the higher earnings estimates among analysts, which push shares higher over the long haul. And those dividend yields are nothing to sneeze at, considering how low interest rates are.

A quick look at stock valuations for the five bank stocks mentioned here, shows that while Bank of America and Citigroup remain "bargain priced" at below tangible book value, the strong earnings performers don't trade much higher on a forward price-to-earnings basis:
  • Shares of Bank of America closed a $12.21 Monday, trading for 0.9 times tangible book value, according to Thomson Reuters Bank Insight, and for 9.3 times the consensus 2014 earnings estimate of $1.32 a share, among analysts polled by Thomson Reuters.
  • Citigroup closed at $43.56 Monday, trading for 0.8 times tangible book value, and for 8.4 times the consensus 2014 EPS estimate of $5.20.
  • JPMorgan's stock trades for 1.3 times tangible book value, and for 8.4 times the consensus 2014 EPS estimate of $5.82.
  • Wells Fargo trades for 1.7 times tangible book value, and for 9.6 times the consensus 2014 EPS estimate of $3.87.
  • USB trades for 2.5 times tangible book value, and for 10.3 times the consensus 2014 EPS estimate of $3.28.

So there you have it. You won't pay much of a premium, on a forward P/E basis, for the long-term stability of Wells Fargo and U.S. Bancorp. Even U.S. Bancorp, the "most expensive" among these five, and rightly so, in light of its fantastic earnings track record, looks cheap. Before the credit crisis, the stock easily traded above 20 times forward earnings.

JPMorgan Chase's stock also has attractive multiples, although the short-term uncertainty over the regulatory and political target on the company's back may give you pause, unless you have a strong stomach and can stick with the investment, despite the headlines.

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