by John Maxfield, The Motley Fool Nov 17th 2013 9:01AM
Updated Nov 17th 2013 9:02AM
If you're a shareholder of BB&T and were hoping it'd raise its dividend next year, I have bad news for you. According to its CEO Kelly King, the mid-Atlantic-based bank isn't planning on doing anything of the sort.
"There is still this downward pressure ... in terms of dividend payout rates," Kelly said on the company's most recent earnings call. He then went on to explain that it will be "challenging to raise dividends at a high level because ... we already have a very high level in terms of payout and dividend yield."
What Kelly is referring to when he mentions "downward pressure" is the Federal Reserve-administered comprehensive capital analysis and review process, or CCAR, which gives the central bank an up-or-down vote on a bank's capital plans.
In this year's CCAR instructions, the Fed didn't mince words, saying that "requests that imply common dividend payout ratios above 30% of projected after-tax net income available to common shareholders in either the BHC baseline or supervisory baseline will receive particularly close scrutiny."
Herein lies BB&T's dilemma.
As you can see in the chart above, it distributed nearly 54% of its earnings to shareholders over the last 12 months. This is more than any of its close competitors. For instance, JPMorgan Chase, Wells Fargo, and U.S. Bancorp all sport payout ratios in and around the 30% threshold.
The net result is that, for better or for worse, BB&T will be left with share buybacks as the only means to return capital to shareholders
It is an interesting analysis that leads you to think of buying back common shares. I suppose that if they buy back enough you think that they might then raise the dividend.
It may be so, but a better strategy might be to buy back preferred shares, since they pay dividends at a higher rate than the common. Consequently, the same money spent on preferred shares would mean even more cash next quarter for dividends,