Bankers are still coy about when dividends are coming back. But they are being more forthright about what the payouts will look like when they return: smaller than before the crisis.
The idea that dividends will not return to prerecession levels is not necessarily surprising — banks have more shares outstanding than two years ago, and profits could be depressed for years.
What is new is that the heads of the country's largest banks are starting to offer more specifics about just where they plan to take dividend levels. This change is the latest stage in the recovery: Financial results are improving, and capital rules are getting clearer — but not enough to declare the bad times over.
Facing questions from dividend-hungry investors this week, the heads of U.S. Bancorp, JP-Morgan Chase & Co. and Bank of America Corp. said they expect eventually to dole out 30% to 40% of earnings to shareholders.
They were sharing half or more of their profits with shareholders before slashing dividends to conserve cash as the economy collapsed in 2008.
The guidance seems to be intended to appease investors eager for good news about dividends, while tempering expectations, experts said. There is evidence that it did both. A number of analysts and investors said the executives' comments show that banks are getting more serious about raising dividends now that loan losses are easing and capital standards are coming into focus after the release of the Basel III plan this week.
"It's positive," said Keith. B. Davis, a principal and research analyst at Farr, Miller & Washington in District of Columbia.
But there also were signs that market watchers were hoping for more.
U.S. Bancorp Chief Executive Richard Davis told shareholders Wednesday that raising the dividend from a nickel a share is the Minneapolis company's top priority. He said U.S. Bancorp wants to bring its dividend ratio — the percentage of profits it returns to shareholders — to 35% to 40% in the long term.
U.S. Bancorp's second-quarter payout ratio was 14.33%, far less than the 50% to 66% it paid from 2005 to 2007. The guidance could also be read as a step back from what Davis told investors in July, saying in the company's earnings call: "We'll plan to go back to the old model. … Our old model was the majority of the earnings paid back in the form of dividends or share repurchases."
Brian Moynihan, the CEO of Bank of America, said that the Charlotte company also wants to return to paying a "reasonable" dividend ratio of 30% and use what's left over to "either buy shares or pay more dividends, if there is no other use for it."
Bank of America's 1-cent-per-share dividend translated into a payout ratio of 3.59% in the second quarter. Its ratio ranged from 46% to 72% from 2005 to 2007.
William Schwartz, senior vice president of U.S. financial institutions for the ratings agency DBRS, said bankers are caught in a bind.
They must project confidence to shareholders that dividends are coming back, he said. But the political climate is still toxic for bankers, so they must also be careful about seeming to boast about being flush and profitable, he said.
The latest guidance seems to be straddling that line, he said.
"These guys are saying … it's a new ballgame out there. We're going to be less profitable. But we still want to be able to pay" shareholders, Schwartz said.
Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor, said Davis and the others are playing it safe by projecting lower dividends than in the past. Keeping the dividend conservative would make another painful round of cuts less likely, he said.
"They don't want to go down that path again in yanking a whole investor class around," McCormick said. "People have long memories."
Jamie Dimon, the CEO of JP-Morgan Chase, has said repeatedly that the New York company would not raise its dividend from a nickel per share until it was certain it would never have to cut it again.
On Tuesday he said during a conference appearance that his company would like to restore the dividend to 30% to 40% of "normalized" earnings. The timing and size of the increase hinges on whether lawmakers let a tax cut on dividends expire at yearend, he said. Regulators also have not firmly said how much capital banks must keep from now on, he said. "We hope we can do [it] early next year," Dimon said. "Can't promise that. That would be our hope."
