Cash-Craving Investors Spur Banks to Special DividendsElizabeth Dexheimer
U.S. bank executives have something special in mind for their investors.
Pressed by shareholders for higher payouts and by regulators to conserve capital, some of the biggest stress-tested lenders including U.S. Bancorp and BB&T Corp. say they’ll consider asking the Federal Reserve to approve one-time special dividends. The head of PNC Financial Services Group Inc. said he’s already floated the idea informally.
Adding special dividends to the mix of capital payouts would finesse the conflicting demands of stockholders for income and regulators for safety. While the Fed might balk at the recurring drain that comes with a bigger regular dividend, investors are speculating that a one-time payment tied to current earnings and capital might pass.
“We’d rather have a full kiss on the lips, but if we can’t get the kiss on the lips, we’ll take the peck on the cheek,” said Greg Donaldson, who oversees $880 million at Donaldson Capital Management in Evansville, Indiana. “It’s a way of appeasing a new group of incredibly huge investors that are dividend-oriented and don’t care much for buybacks.”
Yield-starved investors are clamoring for more cash as $511 billion of capital piled up at the 30 biggest U.S. banks from the start of 2009 to the end of the fourth quarter for a total of $971 billion, according to the Fed. The average yield -- how much a company pays out relative to its price -- for the 24 companies in the KBW Bank Index was 1.85 percent as of yesterday, compared with almost 5 percent in 2007.
U.S. firms would be following the lead of UBS AG, Switzerland’s biggest bank, which said today it’s planning a special payout for investors after it reaches capital targets this year.
Demographics are driving demand as retiring baby boomers rely on dividend checks to support their lifestyle, said Bahl & Gaynor Inc.’s Matt McCormick, who specializes in income investments and helps oversee more than $11.3 billion at the Cincinnati-based firm. They’re getting little help from bonds, with 10-year Treasuries yielding 2.6 percent yesterday.
“Under the right circumstances, a special dividend is certainly one of the things that we would consider,” Andy Cecere, chief financial officer of U.S. Bancorp, the nation’s biggest regional bank, said in an interview. While there are no immediate plans, it could happen “if we were still retaining capital above the level that we needed and the distribution between buybacks and dividends were such that we have the capacity.”
A special dividend could be part of future capital planning, PNC Chief Executive Officer Bill Demchak said during an April conference call, adding that he’s discussed the concept informally with regulators. Fred Solomon, a spokesman for the Pittsburgh-based lender, declined to elaborate.
BB&T would like to be “as aggressive as reasonable on the dividends, including the possibility of special dividends,” CEO Kelly King said during an April conference call.
Shares of Winston-Salem, North Carolina-based BB&T yield about 2.6 percent, compared with 2.4 percent at Minneapolis-based U.S. Bancorp and 2.3 percent for PNC. All three raised their regular dividends in the past year by less than 5 cents.
After passing the Fed’s stress test this year, PNC said it would raise its quarterly dividend by 4 cents to 48 cents. BB&T scheduled a 1-cent increase to 24 cents and U.S. Bancorp will add 1.5 cents to reach 24.5 cents.
“We’ll potentially see special dividends start next year for a selected few,” said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine. “At some point the regulators will have to say to the banks, ‘You’ve done good, you’ve fixed your internal system, you’ve raised enough capital, now we don’t have any restrictions on your excess capital.’”
Gross capital payouts including dividends and stock buybacks for the 23 biggest publicly traded U.S. banks rose to $68 billion after the 2014 stress-test results were released, representing a median 69 percent of net income, according to Keefe Bruyette & Woods. Dividend payouts alone will be a median 23 percent of earnings this year, KBW’s data show.
Theoretically, banks could reallocate money from buybacks to special dividends without increasing the total capital payout. They’d first have to pass the Fed’s annual stress tests, which measure a firm’s ability to survive a financial shock, and then get the regulator’s permission for the shift.
The central bank’s overriding concern is safety and the potential drain on capital. Lenders that seek dividends exceeding 30 percent of profit “receive particularly close scrutiny,” according to the Fed’s website.
JPMorgan Chase & Co., the biggest U.S. bank, got permission to buy back an additional $500 million shares for a total of $6.5 billion, and to raise its dividend by 2 cents. That brought the cash payment to $1.60 a share annually, or 29 percent of earnings, according to estimates from KBW.
If the New York-based lender hypothetically used the $500 million instead for a 13-cent special dividend, the shareholders would get $1.73 a share for 12 months -- about 31.5 percent of earnings, according to KBW estimates. The yield would rise to 3.2 percent from the current 2.95 percent.
Spokesmen for JPMorgan and all of the six biggest U.S. banks declined to comment on future payouts. Jamie Dimon, JPMorgan’s CEO, has said the bank might “add a penny or two every quarter.”
Increasing the regular dividend brings peril because the stock price can get crushed if the payment is later cut, as Bank of America Corp. found April 28 when it suspended a 5-cent increase after finding a flaw in its submission to the Fed. The shares fell 6.3 percent that day. A one-time dividend mutes such risks, according to bankers and analysts.
“Regulators are likely to be indifferent between special dividends and buybacks,” Bill Isaac, former chairman of the Federal Deposit Insurance Corp. and Ohio’s Fifth Third Bancorp, said in a phone interview. Barbara Hagenbaugh, a spokeswoman for the Fed, declined to comment for this article.
Some stockholders prefer dividends because the benefits from buybacks are hard to quantify, according to McCormick. While reducing the outstanding stock can boost earnings per share, the price doesn’t always rise accordingly, the company may be issuing other shares to pay executives and investors must sell holdings to get cash.
“You cannot fake a dividend payment,” McCormick said in a phone interview. “I can’t spend a buyback. I can spend a dividend and my clients need income desperately.”
Buybacks can be “slightly more attractive” because holders are taxed only if they choose to sell and the proceeds can be less than the quarterly raise, said Robert Willens, an independent tax consultant. Buyback profits and regular and special dividends are taxed at the same rate, generally about 15 percent, he said. Special dividends also may not be well-received by investors who seek dependability, according to Keith Davis, an analyst at Farr, Miller & Washington LLC.
“The lack of certainty would not play well,” said Davis, whose Washington-based firm manages $1.07 billion including bank stocks. “You want stability, you want visibility, you want to know what your returns are going to be.”
Regulators demanded dividend cuts after banks received bailouts during the 2008 financial crisis, and the payouts still haven’t recovered. Citigroup Inc. is stuck paying 1 cent a quarter after flunking the stress test in March, as well as in 2012. While San Francisco-based Wells Fargo & Co. has offered special dividends, those payments merely brought the year’s total up to Fed-approved annual limits for the new regular dividend, rather than a true one-time bonus.
More than 60 smaller lenders that were exempt from the Fed’s stress tests on the 30 largest banks sent out extra checks in 2013, boosting payouts an average 50 percent above regular annual levels, according to data compiled by Bloomberg. The biggest firms included Portland, Oregon-based Umpqua Holdings Corp. with $11.8 billion in assets, which paid 5 cents a share on top of its 60-cent yearly payment.
“The hope is that the regulators can get comfortable with it, because it would be a dividend paid on money you actually earned,” Brian Foran, an analyst at Autonomous Research LLP, said in an interview. The trick is to ensure shareholders don’t count on getting the bonus every year, he said. “Once you start putting it out there, can you really keep the expectation that it’s a one-time, no-guarantee-type deal?”