Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Warren Buffett is about to become the top shareholder at Bank of America Corp. He may soon be joined by a lot of less-famous investors flocking to U.S. bank stocks.

Yield, a key consideration for most investors, will be the lure: It's on the rise at U.S. banks, after Fed stress-test results earlier this week gave them the all-clear for sizable payouts. Rising dividends could elevate many banks' yields into or even above the zip code of 10-year U.S. Treasury notes and the S&P 500, which yield roughly 2.3 and 2 percent, respectively, according to Bloomberg data.  

Berkshire's Banks
Warren Buffett's Berkshire Hathaway is set to earn a decent yield from a suite of U.S. lenders
Source: Bloomberg ^Data reflect closing prices as of June 29 *Goldman has not provided updated dividend figures post stress-tests

That could revive investor interest in the sector, and it may not end there: Morgan Stanley analysts expect bank dividends to rise by a median 11 percent in 2018, after a median increase of 12 percent in 2017. Even perennial dividend laggard Citigroup Inc. -- which this week doubled its planned dividend -- may keep narrowing the gap between itself and other major lenders.

Buffett-Less
Citi doubled its yield following the Federal Reserve's recent approval of its payout plans; still, it trails most major rivals
Source: Bloomberg

Bank stocks have rallied by nearly 30 percent since President Donald Trump's election, on hopes of looser regulation and tax-code changes, along with rising interest rates. They arguably still have room to run. Banks are slashing expenses while also, in some cases, bulking up in new businesses to supercharge growth (such as Goldman Sachs Group Inc.'s efforts in consumer lending or JPMorgan Chase & Co.'s credit-card push), which could add further upside.

New Heights?
Bank stocks are heading back to pre-crisis highs; higher dividends will likely stoke more investor interest
Source: Bloomberg
Marginal Gains
Some banks have more room to run than others
Source: Bloomberg

It's true bank stocks are already richly valued, with the KBW Bank Index currently trading at a price-to-book ratio of 1.3, its highest level since 2007. And although that's less than half the lofty levels reached earlier that decade, nobody's expecting an extreme rebound toward a ratio close to 3.0. 

Still, decent dividends, along with exposure to the potential for more upside if factors such as regulatory and tax changes come to pass, may be enough to convince the Sage of Omaha and other investors to stick around awhile.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Notably, the yield on financials has lagged other sectors in the S&P 500, where industries such as telecommunications, utilities and real estate have led.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net