Comerica Inc. outflanked its better-known big-bank rivals by becoming the first dividend-cutting bank to raise its quarterly payout since the economic downturn.
The decision late Tuesday to double its quarterly payout to a dime per share — coming a day before the Federal Reserve released dividend-raising guidelines for the 19 bailed-out banks that underwent stress tests — was an important milestone, experts said.
It is one that may have implications for determining which banks will be around in a few years and which ones won't.
That is because dividend increases — which large banks and their investors have been angling to do for the better part of a year after the vast majority of lenders cut them during the crisis — have emerged as a mark of survival.
Those that can raise the dividend, even modestly, will earn valuable validation from regulators that could translate into happier investors and even better-performing employees, given how bank executives are commonly paid with company stock.
"Employees at Comerica just got a 100% boost in their dividend," said Terry McEvoy, an analyst with Oppenheimer & Co. Inc. "Now they are getting rewarded and their shareholders are getting rewarded."
He added: "Does this put pressure on the other banks? Are they going to feel pressure?"
His short answer — based on the market reaction to Comerica's dividend hike — is: Yes.
Comerica's shares were up less than 1% Wednesday, a good showing as most big bank stocks fell. How far down correlated with their potential to raise the dividend. BB&T Corp., which has returned its federal aid and is eager to raise its dividend from 15 cents per share, was down just 0.82%. Marshall & Ilsley Corp., in turn, was down 2.55%; it has a number of hurdles to clear before it can consider touching its penny-per-share dividend. Other companies that may raise their dividend including JPMorgan Chase & Co, U.S. Bancorp, PNC Financial Services Group Inc. and Wells Fargo & Co. outperformed Wednesday as well.
There's already a chasm between strong banks and not-so-strong banks. Dividends are going to widen it, experts say, now that the criteria are becoming clear for institutions that want to raise them.
The ability to do so will tell shareholders and potential clients that it has the confidence of regulators. That is particularly important because there is a consensus that the industry is poised for a wave of merger activity. Deals only get done with the blessing of bank overseers. Comerica — which has made it clear that it is open to doing deals — clearly has the confidence of its state supervisor, the Texas Department of Banking, and the Fed and the Office of the Comptroller of the Currency, its federal regulators.
Analysts said Comerica, with about $55 billion of assets and roughly 440 branches in Texas, California, Michigan and Arizona, got to raise its dividend first for a few reasons. It wasn't one of the stress-tested banks covered by the Fed's dividend guidelines, and it returned its federal aid in March. It also doesn't have any outstanding trust-preferred securities, having repurchased them earlier this year. It also has the highest tangible common equity ratio among larger banks, at 10.39%, and has a Tier 1 common ratio of 10%.
Jason Goldberg, an analyst with Barclays Capital, said in a research note Wednesday. that two other state-chartered large banks could be positioned for a dividend rise sooner rather than later: BB&T and First Interstate Bancsystem Inc.