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Banks Get Back in the Dividend Game

Jeremy Glaser

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

Bank dividends are back. I'm here today with Josh Peters. He is editor of Morningstar DividendInvestor, and Jaime Peters, she is the senior stock analyst who covers the big banks, to take a look at some of the dividend increases that we saw announced today and what may be in store for dividend bank investors in their future.

Josh, Jaime, thanks for talking with me, today.

Jaime Peters: Hello.

Josh Peters: Hello, good to be here. And just so nobody is out there wondering, we are married.

Glaser: So, Jaime, to start off, I just want to ask a little bit about the Federal Reserve stress test that we just recently found was completed. Can you talk to us a little bit about what the Federal Reserve was looking for and what you think the outcome was?

Jaime Peters: Sure. This is second round of stress test that they went through. The same 19 banks that went through stress tests back in 2009, now they are doing it again here in 2011. This time it's a little bit more rigorous. We're talking about going through Basel III standards. We're talking about putting in the Dodd-Frank regulation bill. All of that is going to be included in this stress test that each bank had to go through during this.

Part of it allowed them, of course, to apply for dividend increases if they wanted to during the process. This is what we're seeing today. We don't actually have all of the results of the stress test yet, but we do have is proof of who passed, because they're allow to raise their dividends.

Glaser: So, who have we seen raise their dividends so far?

Jaime Peters: Wells Fargo, J.P. Morgan, U.S. Bancorp, BB&T. I don't think they waited five minutes before they issued their press release. We also some news from PNC and Bank of New York Mellon which indicates that they have passed, but they're not quite ready to pull the trigger on the dividend raise as yet; they need to talk a little more.

Glaser: So, these were the banks that we expected would be a little bit stronger and we'd expect dividend increase from. What about some of the name we didn't hear from, like Citibank and Bank of America. Anything we could infer from not hearing from them today?

Peters: Actually, not much. Bank of America came out in their analyst day, just a couple of weeks ago, and said, we are applying for a second half of the year dividend increase. So, the fact that we didn't hear from them was not unexpected.

Citigroup suggested they weren't going to look for dividend increases or share repurchases until 2012. So, we weren't expecting to hear from them, either. We don't know what their results were from the stress test.

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Josh Peters: Interesting here, too, just as the news continues to flow in, Capital One, which is one the banks included in the assessment, has actually announced that they are going to hold their dividend flat at a nickel.

Jaime Peters: To add to the kind of interesting situation there is that, the Federal Reserve actually came out in their press release to announce the fact that some companies aren't going to be to raising their dividends. There could be several reasons for that. They actually went out their way to try to suggest that just because there is not an announcement, it does not necessarily mean something is bad.

Glaser: So, we certainly don't know if anybody has really failed or will have to go out and raise a lot more capital, but do you think that some of these companies that have announced dividend increases now will look for even further increase through the year?

Jamie Peters: That is very possible. The Federal Reserve in their announcement did suggest that the bank could resubmit their capital plans every quarter, which then allows and opens the door for banks to submit a higher dividend rate later this year, or banks who have not yet announced to go ahead and raise their dividends later this year.

Glaser: Josh, do you think after these announcements, it's now time for dividend investors to really start looking at financials again?

Josh Peters: I think it's a little bit early if you haven't owned bank stocks or you sold them before or during the crash. I mean the dividend yields here with these initial moves are still not all that great, and there are other sectors of the market, whether it's utilities, pipeline partnerships, or consumer staples--which is now actually the biggest source of dividend income in the market; that's a title that financial services held by a big margin before the crash, and they lost it with all the dividend cutting. [Financials] are not natural, easy picks to start generating a good amount of dividend income right away.

On the other hand, if you have continued to hold these stocks through the crash and the recovery process that we're in now, which is what I decided to do with the three banks that are part of DividendInvestor's Builder model portfolio, then I think you take this as a very positive sign that the recovery story that we've been counting on is now really starting to play out. We are starting to see the first moves toward dividend increases. As Jamie said, it's not going to be the last; we may even see more rounds of dividend increases later this year.

The big question going forward is just how high will those payout ratios get? I think, there is a very good chance that the Fed will not stick with a 30% guideline, that that figure will go up somewhat over the next couple of years, and you are also going to see earnings continue to recovery as long as the economy continues to recover, because credit losses will be coming down.

So, it's I think very good news for long-suffering holders, but I agree with Jamie, the stocks are not cheap enough and the dividend yields specifically are not high enough that I would be looking to put new money to work in this sector right now.

Glaser: Then Jamie or Josh, if you think about the universe of the big bank stocks, if someone did want to purchase today, which ones would be more attractively priced, and which ones look a little bit dearer?

Jamie Peters: Well, J.P. Morgan is a 4-star stock right now, so it is probably one of our cheaper stocks. BB&T is also a 4-star stock right now, whereas U.S. Bancorp is a 3-star stock. So, Wells Fargo, J.P. Morgan, BB&T are all halfway decently priced. There are no cheap bank stocks right now, honestly. They are all in the "okay, you could accumulate them" range, but nothing is a screaming buy right now.

Glaser: Josh, Jamie, thanks for taking the time today to go over this news.

Josh Peters: Thank you.

Jamie Peters: Thank you.

Glaser: From Morningstar, I'm Jeremy Glaser.