Today marks a key Fed decision for big U.S. banks, as the final results of annual stress-tests will be revealed. The results will be revealed after the market closes today and with it will come the new capital return programs from these institutions.
Dividends on the Rise
Analysts expect that all 24 banks that are undergoing this test will be able to increase their dividends for 2015, but to what extent depends on the specific company. As an average, banks are expected to increase their payouts by 11%, but past years have shown that this certainly will not be the case for each stock. After initial results were released last Thursday, some analysts lowered expectations for dividend increases, which has some investors worried for today’s results.
The main idea of the stress tests is to ensure the banks are solvent and able to handle any kind of negative pressure or issues similar to what we saw in 2008. In the stress test the Fed also approves or denies the capital return program for each bank. Citigroup (C ) was one of the banks that failed their test last year and was unable to provide the dividend that they initially aimed for. This year, analysts expect them to increase their dividend sevenfold, to $0.28 per year from just $0.04.
Here are a few key points or banks that investors will want to watch after the closing bell today:
- Citigroup (C ): As mentioned above, the bank failed its tests last year and now has big expectations for a dividend increase this year. Anything short of a pass with a major dividend increase could create stiff selling pressure for the stock.
- Morgan Stanley (MS ):: At a private meeting late last year, Morgan Stanley CEO warned investors not to expect a large dividend or share buyback program. MS will be one to watch in after-hours trading, especially if the dividend hike fails to live up to expectations.
- JP Morgan Chase (JPM ): After initial results were released last Thursday, some analysts have scaled back on their expectations for the giant’s capital return program. Analysts were initially expecting a dividend hike of approximately 6%, but some have lowered forecasts in recent days.
- Bank of America (BAC ): Bank of America has had trouble with their dividend in the past and this year may be no different, as analysts have lowered their expectations for the bank in recent days.
The Bottom Line: The Need for Stress Tests
As a dividend investor, especially one with a stake in one of these major financial institutions, it can be frustrating to see capital return programs shut down by the Fed, but you need to remember why the check was initially put in place. The global financial system nearly collapsed in 2008 (some would even argue that it actually did), and it has taken years for the economy to recover. Meanwhile, many economies abroad are still struggling.
The Fed stress tests seem to get more rigorous each year and have an element of subjectivity that likely infuriates big banks, but ensuring that 2008 never repeats itself is certainly worth the price. Regulations are put in place for a reason and if 2008 taught us anything, it’s that financial juggernauts have no problem getting themselves into trouble when the Fed is not looking closely at their operations.
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