Market Overview

30 June 2021

The Largest U.S. Banks Lifted Their Dividend Payouts

The stocks of the U.S. financial system grandees are on the rise again, after about a three-week period of a corrective mood. On the night of June 28th to 29th, five of the six largest American banks increased the amount of their quarterly dividends, soon after the Federal Reserve System (Fed) gave permission for this move. As a whole, the dividend sizes for these six financial institutions would be increased by 40%. However, each financial institution has made its own decision about the scale of the increase. Last week, the Fed announced that the temporary restrictions imposed due to the COVID-19 pandemic for bank dividends and buyback programs will be lifted after June 30. 

The most attractive dividend plans have been announced by Morgan Stanley and Goldman Sachs. In particular, Morgan Stanley lifted its quarterly payout to 70 cents a share from the previous size of 35 cents, a 100% increase, resulting in an annual yield of nearly 3.08%, based on the current share price of more than $91.00 on today's pre-market. The price of Morgan Stanley shares jumped by 3.7% after its dividend decision, while it was quoted at $87.70 before Monday's session close. 

Although some market participants may feel the dividend increases could be already priced in, this is unlikely to be the case. For example, Barclays analyst Jason Goldberg and Barrons strategists had previously estimated that Morgan Stanley’s quarterly dividend size could rise to merely 55 cent, producing just a 2.5% annual yield. So the actual actions of the bank turned out to be bolder, exceeding the expectations of those experts mentioned above. 

In addition, Morgan Stanley announced the buyback of its own shares in the amount of $12 billion over the next 12 months. This could be seen to be a very good pace, which could speak eloquently about the bank's confidence in its own future financial results. Therefore, it may also contribute well to the possible growth of market capitalization on the part of other holders. 

After the price of Morgan Stanley shares fell below $84 just a dozen days ago, for now it seems there may scarcely be anything that could theoretically prevent this asset from testing its all-time historical peak of $94.27, reached in early June, keeping in mind each and every possible new target above $100 per share. This is highly likely to be the basic scenario, given that the bank has very successfully endured the pandemic year, collecting revenues of $48.2 billion compared to $41.4 in 2019, and has already brought in $15.72 for the first quarter of the current year alone. Earnings of $2.22 per share for Q1 2021 also broke all previous records, it makes a strong impression when compared with $1.33 of equity per share in Q1 2019. 

Wells Fargo also doubled its dividend payout from 10 to 20 cents per quarter, announcing a $18 billion buyback program over the next 12 months. But most experts expected the dividend to rise for Wells Fargo shareholders to some higher levels of at least 25 cents. This could be the main reason why Wells Fargo shares sank by 2.18% during Tuesday's trading session in New York. Wells Fargo dynamics is also affected by the generally negative long-term background of this banking organisation over the past five years after the reported fraud scandal broke out in 2016-2017, as some of its employees created several million fake accounts and credit cards. 

Meanwhile, Goldman Sachs Group (GS) performed a 60% dividend boost by raising its size to $2 from $1.25 each quarter. Most analysts polled by Reuters expected this size for Goldman Sachs, so the market did not move up as strongly as it could have in absence of such bets of the investment community made beforehand. Nevertheless, GS stocks rose from less than $350 per share on June 18 to more than $368 by the end of last week, and yesterday soared to more than $378. Before the opening of today's American session, GS was trading just below $373, but in the medium term they retained excellent prospects to test the area of at least $393 per share, which they had already visited four weeks ago. 

The Bank of America Corp raised its dividend to 21 cents from 18 cents per share, while JPMorgan Chase & Co decided to lift its quarter reward for holders to $1 from 90 cents per share. Many expected more from these famous institutions, so their shares did not show positive dynamics yesterday. Citigroup is said to not increase the amount of dividend payments yet, keeping them at 51 cents per share, the Wall Street Journal reports. Therefore, Citigroup shares lost as much as 2.56% of its value after that frustrated announcement. However, few doubt that a similar decision to raise dividends is only a matter of time for Citigroup and for a number of other banks. 

Of course, the probability of a return to the June downward dynamics after a super growth for almost half a year in the banking sector shares cannot completely be discounted. Much depends on the pace of recovery of real business, which determines the state of bank loan portfolios. Some spikes in detected cases of the coronavirus in Australia and some Asian countries, including Malaysia, Indonesia and Thailand, can slow down global trade relations. However, the results of the latest stress tests showed that the largest American banking institutions have enough capital margin of safety to withstand any possible downturn in the global economy if it may take place before the end of the year.

 

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