Banks are caught in a tug of war over dividends and share repurchases. They are being pulled in one direction by some regulators and industry critics who argue equity requirements remain far too lax, in the other by shareholders eager to get back some of their “trapped capital.”
The latter team gained ground after this winter’s stress tests cleared most large banks to pay out some capital. Still, while dividends are climbing, they remain well below levels posted in the middle of the last decade. And repurchases have played a small role in distributions to stockholders since the financial meltdown. (See the following graphic. Interactive controls are described in the captions. Text continues below.)
Among bank holding companies with at least $50 billion of assets at yearend that have shares listed on major exchanges (excluding several securities firms and trust and custody banks) — a group of 18 — net repurchases of common stock totaled just $550 million in 2012, or 0.7% of net income. Net repurchases reflect buybacks, less amounts issued to raise capital and make compensation awards.
Dividends on common stock totaled $15 billion in 2012 for the group, or 19% of net income.
In 2006, net repurchases accounted for 25% of net income and dividends 42%. (Dollar amounts were also higher in 2006 — $21 billion in net repurchases and $36 billion in dividends — even though the companies were much smaller before a wave of crisis-era acquisitions and the historical figures do not include American Express (AXP) or Discover (DFS) since regulatory data is not available for them prior to their conversion to bank holding companies in 2008 and 2009.)
During the recession, the group raised hundreds of billions of dollars to shore up capital, and slashed dividends after their dividend-to-net income ratios surged because of a collapse in earnings.
Now, banks are set to rev up payouts. JPMorgan Chase (JPM) is positioned to undo a retreat from buybacks this year after receiving conditional approval from the Federal Reserve for gross repurchases of $6 billion. (The company was instructed to submit an additional capital plan by the third quarter to address weaknesses in its capital planning process.) The New York bank stopped buying back stock in May last year after the emergence of the London Whale trading debacle, a set of bets on credit derivatives that racked up losses of more than $6 billion. Stock issuance outweighed JPMorgan’s gross repurchases in 2012 by $1 billion.
U.S. Bancorp (USB), which had already achieved a combined payout ratio (net repurchases and dividends to net income) of about 50% in 2012, said it was aiming to increase its dividends and buybacks by about 20% during the 12 months that began April 1. The company has said it is targeting a combined payout ratio of 60% to 80%, with the retained capital supporting organic asset growth and acquisitions. It said it would also like to lift dividends above 30% of net income but is wary of testing regulators’ concerns that dividends are harder to dial back than repurchases.
“You can approve buybacks and you can stop them” quickly thereafter, CEO Richard Davis has said. But “nobody wants to be embarrassed and have to go cut the dividend again.”
American Express is poised to keep its foot on the gas with a planned 15% increase in its dividend — its combined payout ratio was 97% in 2012 — though the company says over the long term it plans to pay out about half of its earnings to shareholders.
Several banks that posted negative or breakeven combined payout ratios in 2012 according to regulatory data would break solidly above water according to estimates from KBW based on capital plan announcements for the year beginning April 1: about 35% for Bank of America and Regions Financial, for instance.
The debate over bank capital is far from over, but for now, payouts are gaining momentum.