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Large bank shareholders prime for big return on their patience

Large bank shareholders prime for big return on their patience

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Shareholders in many of the nation’s 34 largest financial institutions appear set to receive a significant return on their investments — and for their patience — over the next year.

Shortly after the Federal Reserve Board approved on Wednesday the capital plans of 34 national and regional banks, 25 of them declared their intention to raise their dividend and/or ramp up their share repurchase programs.

In each case, the capital plans require the approval of boards of directors. The 34 banks, each with at least $50 billion in total assets, represent more than 75 percent of domestic banking assets.

Some banks, such as Bank of America Corp. (up 5.5 cents to 12 cents), Citigroup Inc. (up 16 cents to 32 cents), Citizens Financial Group Inc. (up 8 cents to 22 cents), PNC Financial Services Group Inc. (up 20 cents to 75 cents) and SunTrust Banks Inc. (up 14 cents to 40 cents), are increasing their dividend per share between 36 percent and 100 percent.

Those banks took bold dividend steps in part because their previous financial status had limited their capital flexibility.

Other banks, such as BB&T Corp. (up 3 cents to 33 cents) and Wells Fargo & Co. (up 1 cent to 39 cents), had more modest increases because they had been raising their dividends in sizable chunks for several years.

A similar tactic held true with share purchases, with some going as high as $19.4 billion by JPMorgan Chase & Co., $15.6 billion by Citigroup, $12.9 billion by Bank of America and $11.8 by Wells Fargo. BB&T pledged a $1.88 billion commitment.

A company typically buys back its shares from the marketplace to reduce the number of outstanding stock shares. Because there are fewer outstanding shares, those remaining can become more valuable.

Companies also buy back shares when they believe the shares are undervalued.

The Fed’s Comprehensive Capital Analysis and Review, in its seventh year, evaluates the capital planning processes and capital adequacy of the 34 bank holding companies, including their planned capital actions that also include potential major acquisitions.

Since the Fed stress test began, BB&T’s dividend has more than doubled to 33 cents. Wells Fargo’s dividend has more than tripled from a low of 12 cents.

Nancy Bush, with NAB Securities LLC, said the lofty dividend and share repurchase proposals represent confirmation that most national and regional banks prefer creating shareholder value through those means over buying another bank at prices higher than they want to pay.

“Citigroup and Bank of America had to show something to their shareholders for their patience, particularly since they were criticized for emphasizing share repurchases over dividend hikes in 2016,” Bush said.

“SunTrust has had a reputation for struggling to cut costs, so it is hoping to pump up investor confidence in them with these steps,” she said.

Arnold Danielson, the chairman of Danielson & Associates, a financial-services firm, said that “there’s question that Bank of America is playing catch-up trying to get in and stay in the 2 percent yield range.”

“The only other one that seems a little out of the norm is SunTrust on the high side, and that may reflect comparative negative performance,” Danielson said. “Buyback numbers, of course, are nice to have in hand but do not have to be used.”

Chris Marinac, managing principal with FIG Partners of Atlanta, said he remains bullish on BB&T’s share price in part because of its dividend and share repurchase plans.

“Our share count is important and drops each quarter as BB&T steps up its buyback and now signals a 100 percent return of capital via earnings returned to shareholders via cash dividends and repurchase,” Marinac said.

As far as SunTrust, he said that by raising its quarterly dividend by 14 cents to 40 cents, for a new yield of 2.85 percent, and spending $1.32 billion on share repurchases over the next 12 months, its capital return to investors would exceed 100 percent in 2018.

“We feel the higher yield on the stock could help achieve our $61 price target in the next four to six months,” Marinac said.

rcraver@wsjournal.com 336-727-7376 @rcraverWSJ

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