The banking industry's rebound is sparking a wave of dividend increases.
So far this month, eight big banks have boosted their payouts. And all signs point to the trend continuing into next year.
John Leonard, an analyst with Salomon Brothers, predicts that "at least two-thirds of the top 50 banks will have increased their dividends" between Oct. 1 and next March 31.
The most likely candidates: BankAmerica Corp., NationsBank, Comerica Inc., KeyCorp, Fleet Financial Group, and Crestar Financial Corp.
The higher payouts will come because banks are now flush with record levels of equity. And most banks are confident that they will continue to earn relatively high profits, pushing their equity levels even higher.
But loan demand is expected to remain sluggish, which means banks cannot invest their surplus equity in high-yielding assets. Rather than risk reducing their returns on equity, banks are expected to pay out some of these funds to shareholders.
In recent weeks, eight major banking companies have either announced dividend increases or reinstated dividends on their common stock.
The dividend hikes in some cases were more than 20%. Signet Banking, for example, announced Friday a whopping 50% dividend increase. Ten smaller banks also have raised their dividends this month.
Future dividend increases at big banks will likely be between 10% and 15%, Mr. Leonard predicted.
Move by Chemical?
Although Chemical Banking Corp. said last week that it had no plans to increase its dividend, some analysts still predict the company will raise its payout.
Chemical has said it wants to acquire banks in New Jersey and Texas, which means it must compete against other potential acquirers such as Banc One Corp., Norwest Corp., and PNC Financial Corp.
But Chemical's shares sell at a comparatively weak seven times earnings and just slightly over book value, giving it less firepower in an acquisition for stock.
The dividend increases come roughly a year after many banks cut their payouts. In 1991, 30 banks slashed their dividends and 20 eliminated them altogether according to Keefe, Bruyette & Woods Inc. At the biggest 147 banks, the average dividend increase was less than 1%.
Most banks try to keep the portion of per-share earnings that go into dividends to between 30% and 35%. But some analysts believe that the payout ratio will exceed that range for some banks.
"I wouldn't be surprised to see banks move payout ratios over 40%," said Dennis Shea, an analyst at Morgan Stanley & Co. "They may not need to retain as much equity as they have."
Among the regional banks Mr. Shea follows, average Tier 1 capital was more than 9% at the end of the second quarter, more than double regulatory minimums. The ratio of equity to assets was 6.67%, an extremely high level.
Some banks with room to raise dividends may wait until next year. The third-quarter earnings reports were strong, which helped share prices. Analysts are already anticipating a strong fourth quarter, which may again strength banks' stock prices.
By waiting until the first quarter of next year to announce a dividend increase, banks could give their share prices another push.
That's because banks that raise their dividends are almost invariably rewarded with a higher stock price. Signet's shares, for example, rose $1.125 Friday, to $39.
Big Gain for PNC
PNC Financial Corp., which announced a 7.5% dividend hike on Oct. 1, saw its shares surge $3, or 5%, to $53.
Bank of Boston surprised analysts by announcing Thursday it would reinstate the dividend it eliminated last year. Its share price rose 75 cents on Thursday, to $21.625, helped by a strong earnings report.
Analysts viewed the restored 10-cent quarterly dividend as a sign that both management and the regulators were comfortable with the bank's future earnings and asset quality.Who's Next?Banks that may increasedividends within six months Analysts' Annual projected dividend dividendBankAmerica $1.32 $1.50Comerica 1.88 2.10Crestar 0.80 0.90Fleet 0.80 0.90KeyCorp 1.04 1.20NationsBank 1.48 1.64Sources: Alex, Brown & Sons,Salomon BrothersRising PayoutsBanks that have announced dividend hikes since Oct. 1 New Immediate quarterly Percentage change in dividend increase share priceBank of Boston 10 [cents] NA(*) $0.75First Fidelity 35 [cents] 9.4% $0.75First Tennessee 36 [cents] 20% $0.75First Union 35 [cents] 12% FlatNBD 27 [cents] 8% $1.857Old Kent 26 [cents] 13% FlatPNC 57 [cents] 7.5% $3.00Signet Banking 30 [cents] 50% $1.125(*) Dividend had been omittedSource: SNL Securities, company reports