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4 Ways to Play Financial Stock Dividend Hikes - 22312 views
BALTIMORE (Stockpickr) -- Dividends are back in a big way for financial stocks. While that recent slew of financial sector dividend increases may seem like an April Fool’s joke straight from Wall Street, it’s not. Some of the biggest banks-- and biggest recipients of government funds -- have decided to raise their payouts to shareholders by a substantial amount. The implications are big.
Even though many analysts continue to be concerned with financial health at the banks, dividend hikes at the big banks do suggest that financial conditions are improving enough to begin to repay shareholders for their capital contributions over the last several years.
At the same time, the decision to increase shareholder value is hardly unilateral for banks’ management teams; banks deemed “too big to fail” have to get the green light from the Fed. (The Fed is actually holding firms to that standard -- Bank of America’s (BAC) proposed dividend payment was denied.)
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With improving balance sheets and relevant income payouts, it makes sense to take a look at bank stocks again, particularly because of the historically significant effect those dividends have on investors’ total returns.
Over the last 36 years, dividend stocks outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders, according to a study from NDR. That said, not all dividend stocks are created equal. While that statistic applies to all companies that pay dividends, the companies that increase those dividend payouts over time are even better.
Here’s a look at some of the stocks announcing dividend payouts this week, including a handful of best-in-class financial stocks.
Bank of New York Mellon
Of all the bank dividend hikes of the last week, Bank of New York Mellon (BK) posted the smallest -- a 44.4% increase that brings the firm’s quarterly payout to 13 cents per share. But don’t let the percentage increase fool you. As one of the healthiest large U.S. banks, BNY Mellon’s comparably smaller hike still puts its dividend yield in the same class as most of its bigger-increased peers.
Part of the reason for BNY Mellon’s success is the bank’s decision long ago to diverge from a traditional retail or commercial bank, and instead focus on servicing the needs of financial institutions. As a result, the firm is one of the world’s biggest global custody banks (holding physical client accounts for asset managers), and a major player in providing trust services for security issuers.
BNY Mellon’s sheer scale as a custodian gives the bank access to a huge base of cheap capital, one that hit record highs to close 2010. Investors should expect revenues from its biggest businesses to climb in kind.
Fifth Third Bancorp
While Fifth Third Bancorp (FITB) does fit the mold of the traditional banking stock, the company is leaps and bounds from where it stood just a couple years ago. The bank is a major player in the Midwest and in the South, where it operates more than 1,400 banking locations. That geographic footprint proved unlucky for Fifth Third as the bottom fell out from the real estate market -- major markets like Michigan and Florida saw defaults balloon out of control, and the bank saw profitability get smashed to oblivion.
That’s changed, though. Fifth Third pulled off the charge-off bandage in a quick motion following 2008’s housing crash, charging off nonperforming loans quickly, and recapitalizing its balance sheet to cope with the deteriorating market environment. While those actions were painful for shareholders, they’ve spared them from the prolonged floundering faced by larger banks that were less drastic in writing off bad loans.
And now, with profitability restored, the dividends are coming back to regular levels. Last week, Fifth Third announced a 500% dividend increase, bringing its quarterly payout to 6 cents per share. That puts the bank’s yield at 1.73% at current price levels. More significant, it represents a nearly 14% yield for investors who picked up bargain-priced shares back in 2009. That’s a significant reward for being a contrarian income investor.
Fifth Third, one of the top holdings at David Tepper's Appaloosa Management, shows up on recent lists of 10 Midwest Bank Stocks Rally Ready and 10 Bank Stocks With Great Expectations.
As one of the world’s biggest banks -- second biggest by market-cap, in fact -- it’s a big deal when JPMorgan Chase (JPM) increases its dividend. The Fed approved a 400% dividend hike that was announced last week, bringing JPM’s dividend to 25 cents per share and its yield to 2.17%.
That high yield is thanks in large part to the company’s best-in-breed balance sheet among the big three banks. JPMorgan stayed more conservative than its highly leveraged peers in the years leading up to the credit crunch, and as a result it’s been able to outperform them.
Unlike its peers, who’ve “returned to their roots” and refocused on the retail and commercial banking businesses, JPM is seeing its biggest boost from its investment banking business as firms have sought to raise additional capital in recent years. The bank’s bargain-priced 2008 acquisition of Bear Stearns has played no small part in that success.
JPMorgan, one of 10 stocks hedge funds were buying like crazy in the most recently reported period, shows up on a recent list of 3 Goldman Bank Dividend Plays and is one of the 10 best Dow stocks since the March 2009 low.
Discover Financial Services
Not all the big financial sector dividend payers are banks, of course. Take Discover Financial Services (DFS), for instance. The $13 billion credit card issuer and payment network isn’t just a major dividend increaser from last week -- it’s also one of this week’s Rocket Stocks.
Increasing analyst sentiment in Discover isn’t surprising. An increase in consumer spending has been intensely beneficial for competitors such as Visa (V) and American Express (AXP), and the company’s unique business gives it a significant edge. So does its size; with a market capitalization of just $13 billion, Discover is far from reaching its full growth potential and could make an attractive acquisition target for a bigger credit card issuer.
While the firm’s dividend yield is on the smaller side of the spectrum, this stock has plenty of reasons to be on investors’ radar.
Discover is one of TheStreet Ratins' Top-Rated Consumer Finance Stocks.
Ultimately, financials were only a part of the slew of stocks that posted new dividend payouts in the last week. Other notable payers include Oracle (ORCL), the $169 billion software giant that’s been moving into the hardware business of late. Oracle is the biggest database software firm in the world, an enviable position that’s remained strong despite looming competition from other big name IT firms.
Oracle announced a 20% dividend increase this past week. With a massive net cash position, attractive newly acquired intellectual property from the purchase of Sun Microsystems, and a growing dividend, this firm should continue to beat the market in 2011.
Oracle is one of TheStreet Ratings' Top-Rated Software Stocks.
For the rest of this week’s dividend stocks, check out the Dividend Stocks for the Week portfolio on Stockpickr.
And if you haven't already done so, join Stockpickr today to create your own dividend portfolio.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, Elmerraji had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.