Fifth Third to Buyback, May Up Div


Shareholders of Fifth Third Bancorp (FITB) can now breathe a sigh of relief as the company announced yesterday that the Federal Reserve did not object to its proposed capital plan through March 2013, which included possible increase in its dividend in the third quarter as well as share buybacks.

Fifth Third, which currently pays a dividend of 8 cents per share, has proposed a raise in its dividend to 10 cents. Following the Fed’s nod, the company would consider the probability of a dividend raise in its scheduled regular meeting in September.

In addition to a positive development on the dividend front, Fifth Third’s Board of Directors approved a new share buyback authorization of 100 million shares. This replaced the previous authorization from 2007 that had 14 million shares remaining.

As a matter of fact, Fifth Third’s capital plan includes potential share repurchases of up to $600 million through the first quarter of 2013, plus any incremental buybacks related to any after-tax gains from the Vantiv Inc. (VNTV) sale. Fifth Third intends to soon begin with the share buybacks through a contract with a counterparty, which would buyback $350 million worth of common shares on its behalf.

Notably, Fifth Third could not clear the stress test earlier this year and in June the company resubmitted its proposed capital actions through March 31, 2013. This time it managed to get a no-objection. However, for any capital moves beyond that date, Fifth Third will again have to submit a subsequent plan.

Our Take

In March, the Fed’s objection to a number of elements in Fifth Third's capital plan, including increases in its quarterly common dividend and the initiation of common share repurchases, had put the company in the back foot and weakened its competitive position to some extent.  Therefore, a positive development on that front is encouraging. In fact, this will inspire investors’ confidence in the stock.

As a matter of fact, though a number of Wall Street biggies such as U.S. Bancorp (USB) and Wells Fargo & Co. (WFC), passed the stress test with their proposed capital plans including dividend increases and share buybacks, companies such as Fifth Third and Citigroup Inc. (C) faced a setback as the Fed objected to their capital plans.

While Fifth Third included possible dividend increase and share buyback plans in the resubmitted version, Citi decided against any hike in its shareholders payout in 2012. Instead of boosting its capital payouts, Citi intends to build its capital level and continue with efforts to trim its non-core assets.

Going forward, we believe that with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovering economy. Its traditional commercial banking franchise, diverse revenue mix, improved credit quality and enhanced capital position serves as a positive catalyst for the stock. Capital deployment efforts are encouraging. Yet, a low interest rate environment, regulatory issues as well as competitive pressures are the headwinds.

Fifth Third currently retains its Zacks #2 Rank, which translates into a short-term Buy rating. However, considering its fundamentals, we have a long term Neutral recommendation on the stock.

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