3 Biggest Bank Stress Test Dividend Winners

TheStreet.com

NEW YORK (TheStreet) -- While the elections and the "fiscal cliff" negotiations in Congress have investors in a world of worry, bank stock investors can look forward to some good news as we head into the next round of Federal Reserve stress tests.

The 19 largest U.S. banks are required to submit their own annual stress test results to the Federal Reserve in early January, along with their plans for returns of capital to investors for the remainder of 2013 and the first quarter of 2014. While the increase in dividend and payouts and stock buybacks may be relatively modest, the banking industry's profitability continues to grow, and the major players have been building capital for several years now. Long-suffering investors are looking for a greater cut.

Deutsche Bank analyst Matt O'Connor said on Tuesday that "key assumptions and scenarios for the 2013 CCAR Comprehensive Capital Analysis and Review process are expected by Nov. 15," and said that "on the one hand, capital and liquidity levels are high, credit quality is improving and balance sheet growth is modest," all of which "suggest capital deployment levels should be up meaningfully from the roughly 35% combined dividend and buyback payout ratio for 2012."

"However, we expect the Fed to be conservative given continued macro uncertainty, the sluggish job market and still tight credit (by banks)," O'Connor said, adding that because of the weak job growth and strict lending standards, "we have a difficult time thinking (from a political point of view) that capital deployment can equal/exceed annual earnings until unemployment has come down and credit standards have been loosened."

As we have seen over previous years, O'Connor expects the "market sensitive banks" -- including Bank of America BAC , Citigroup C , Goldman Sachs GS , Morgan Stanley MS and JPMorgan Chase JPM -- to be limited to capital deployment ranging between 25% and 30% of earnings, with the Federal Reserve allowing super-regional banks to have combined payout ratios (including dividends and share buybacks) of "about 60% on average."

As we saw with JPMorgan Chase this year, after CEO James Dimon first announced in May that the company was looking at a large second-quarter trading loss from the hedging activity of JPM's Chief Investment Office, a large buyback program -- in this case $15 billion planned through the first quarter of 2013 -- can be abruptly suspended. Even though JPMorgan still wound up with a $5 billion second-quarter profit and was even more profitable in the third quarter, the buyback program has not been restarted.

JPMorgan's shares already have an attractive dividend yield of 2.84%, based on a quarterly payout of 30 cents and Monday's closing price of $42.27. O'Connor expects JPMorgan's dividend payout to increase to $5.567 billion in 2013 from $4.656 billion in 2012, with the stock's "implied yield" climbing to 3.3%. The analyst said that "we believe expectations are too high for JPM in particular," and does not expect JPMorgan to resume common share buybacks in 2013.

As large-cap banks have strengthened over the past two years, regulators have generally held the line on dividend payout to roughly 30% of earnings. O'Connor said that "we expect some softening of the 30% dividend payout cap in 2012, possibly to a range of 30-40%," in which case, he expects the highest yielding bank stocks under his coverage to be Fifth Third Bancorp FITB of Cincinnati, with a dividend yield of 4%, Wells Fargo WFC , with a yield of 3.6%, and BB&T BBT of Winston-Salem, N.C., with a yield of 3.4%.

The following are the three super-regional banks that O'Connor expects to have the highest combined ratio of common stock dividends and share buybacks in 2013:

3. U.S. Bancorp


Shares of U.S. Bancorp USB of Minneapolis closed at $33.14 Monday, returning 25% year-to-date, following a 2% return during 2011, which was actually a rather good showing, considering that the KBW Bank Index I:BKX was down 25% last year.

U.S. Bancorp's shares trade for 2.6 times tangible book value, according to Thomson Reuters Bank insight, which is the highest price-to-book ratio for the 24 components of the KBW Bank Index, and reflects the company's status as the strongest and most consistent earner among the index components with an operating return on average assets (ROA) ranging between 1.58% and 1.71% over the past five quarters. The shares trade for 11 times the consensus 2013 earnings estimate of $3.07, among analysts polled by Thomson Reuters.

Based on a quarterly payout of 19.5 cents, the shares have a dividend yield of 2.35%. U.S. Bancorp's board of directors in March authorized a program to buy back up to 100 million common shares. Through the first three quarters, the company bought back 17,122,303 shares, at an average price of $33.92, for roughly $581 million.

O'Connor expects U.S. Bancorp to payout out 75% of its earnings through dividends and share buybacks during 2013, with dividends increasing to $1.917 billion from $1.479 billion in 2012, and buybacks increasing to $2.161 billion from $2.005 billion.

The analyst expects U.S. Bancorp's dividend yield for 2013 to increase to 3.1%.

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2. KeyCorp


Shares of KeyCorp KEY of Cleveland closed at $8.46 Monday, returning 12% year-to-date, following a 12% decline last year.

The shares trade for 0.9 times tangible book value, and for 10 times the consensus 2013 EPS estimate of 88 cents.

KeyCorp's ROA has ranged between 0.93% and 1.09% over the past five quarters, according to Thomson Reuters Bank Insight.

Based on a quarterly payout of five cents, the shares have a dividend yield of 2.36%. KeyCorp's board of directors in March authorized a program to buy back up to $344 million worth of common shares. The company bought back $167 million worth of shares during the first three quarters of 2012.

O'Connor expects KeyCorp's combined payout ratio for 2013 to be 83%, with the company's dividend payout increasing to $247 million from $167 million in 2012, and common share buybacks increasing to $389 million from $252 million.

Deutsche Bank expects KeyCorp's dividend yield in 2013 to increase to 3.3%.

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1. Comerica


Shares of Comerica CMA of Dallas closed at $29.99 Monday, returning 18% year-to-date, following a 38% decline during 2011.

The shares trade for0.9 times tangible book value, and for 11 times the consensus 2013 EPS estimate of $2.63.

Comerica's ROA has ranged between 0.67% and 0.93% over the past five quarters, according to Thomson Reuters Bank Insight.

Based on a quarterly payout of 15 cents, the shares have a dividend yield of 2.00%. Comerica's board in March authorized up to $375 million in common stock repurchases through the first quarter of 2013. The company bought back about $215.5 million in shares during the first three quarters of 2012.

O'Connor expects Comerica's combined payout ratio during 2013 to be 101%, with dividends increasing to $137 million from $106 million in 2012, and common share buybacks increasing to $328 million from $293 million.

The analyst expects Comerica's 2013 dividend yield to increase to 2.5%.

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-- Written by Philip van Doorn in Jupiter, Fla.

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