Special dividends have not been part of big banks’ repertoire in more than a decade. That could change under the new tax law.
Many banks have said they will return to shareholders some excess capital built up from tax savings, primarily through higher regular dividends or stock buybacks or both.
Bank executives had little to say in recent earnings calls about the possibility of adding special dividends to the mix, but they are starting to get questions about them because of the extra capital that could pile up.
Bill Demchak, the chairman and CEO of PNC Financial Services Group in Pittsburgh, was circumspect when pressed about special dividends — but he didn’t rule them out.
"Rather than talk about special or nonspecial, I think the simple answer is, given price-to-book ratios, for us and the industry at this point, our bias would be towards dividends versus buyback," Demchak said on PNC’s fourth-quarter earnings call.
Why the caution on his part, and the cricket noises most everywhere else, according a search for the term in big banks’ conference-call transcripts? Probably the fear of getting ahead of regulators.
Banks subject to the Federal Reserve’s stress tests are required to ask for regulators’ approval to pay special dividends. These banks didn’t seek permission during the financial crisis, as regulators wanted them to focus on building capital cushions.
But the payment of special dividends would be yet another way to reward shareholders, said Gerard Cassidy, an analyst at RBC Capital Markets. Banks might be encouraged to pay one-time special dividends if they don’t believe they can achieve an adequate return on capital through regular dividends or buybacks, Cassidy said.
Banks had already built stronger capital positions, and the tax cut will only fuel that trend.
Special dividends might appeal to regulators in certain circumstances, Cassidy said. Regulators prefer that banks not raise their dividend payout ratios above 40%, he said. That’s because if banks later need to decrease the rate below 40%, it sends the wrong message to the market.
“There’s a negative effect that cutting those dividends has on the market and industry and consumer psychology during an economic crisis,” Cassidy said.
A Fed spokesman declined to comment for this story.
Smaller banks only need board approval to pay special dividends, and they approve special dividends on a somewhat regular basis. Since Dec. 1, several institutions have paid or declared a special dividend, including the $9.9 billion-asset Provident Financial Services in Iselin, N.J.; the $1.4 billion-asset MBT Financial in Monroe, Mich.; and the $360 million-asset First Citrus Bancorp. in Tampa, Fla.
“This special dividend is consistent with our sound capital management policies and our commitment to providing a meaningful return to our stockholders,” Provident Chairman Christopher Martin said in a news release Jan. 25. “Following this special dividend our capital ratios will remain strong.”
Still, skeptics of a comeback remain. Special dividends are typically used only to reward longtime shareholders, or to distribute funds from a one-time windfall, said Marty Mosby, an analyst at Vining Sparks.
“There is limited use for special dividends in strategic capital management,” Mosby said.
Additionally, some financial institutions may not be able to pursue special dividends for a while. In the fourth quarter, American Express recorded a $2.6 billion charge to cover changes related to the new tax law. The New York company will suspend its share-buyback program for the first half of this year to rebuild its capital levels.
“Of course … the new tax law does significantly lower our tax rate going forward, which increases the capital-generating power of the business,” Chief Financial Officer Jeffrey Campbell said during a Jan. 18 conference call. “We expect that, over time, we will more than make up for any reductions in the buyback in 2018 and generate more earnings and return more capital than we would have without tax reform.”
While it’s possible that banks could seek regulatory approval this year, it’s more likely they’ll wait until 2019 to aggressively pursue special dividends, Cassidy said.
But some of them have been entertaining the idea for a while.
The topic of special dividends was raised shortly after Donald Trump’s election in November 2016 as the banking industry anticipated a potentially more business-friendly regulatory approach.
An analyst asked JPMorgan Chase Chairman and CEO Jamie Dimon in December 2016 if he might raise the company’s regular dividend.
“If the stock was selling at a certain price, it might just be better to give you a special dividend,” Dimon said.