Does the Stress Test Mean a Return to Dividends?
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On Thursday Mar. 7, the Federal Reserve announced that most banks passed the stress tests that were placed on them. This is a positive sign of strength for the financial industry, but the real question is what this means for investors. The Dow recently hit an all time high. Since its low, the Dow is up 119%.
What is the stress test?
The Federal Reserve administers the stress tests to banks. The goal is to test how resilient the banks would be in the event of a major downturn in the economy. For the 2013 test, the Federal Reserve tested the following scenarios:
- Unemployment rising to 12%
- Equity value dropping by 50%
- Home prices declining by 20%
The test measures the effectiveness of capital planning and liquidity in the event a massive economic collapse happens again.
The results
Ally Financial, the former lending operation of General Motors, was the only large bank that did not pass the stress test. The test determined that the other 17 large banks would survive an economic downturn but would lose a combined $462 billion.
Citigroup (NYSE: C) outperformed the group after failing last year. The other laggards in the group were JPMorgan Chase (NYSE: JPM) and Goldman Sachs (NYSE: GS). Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) fared decently in the test.
What this means for investors
The stress test from the Federal Reserve had some criticism from some analysts saying the test was too easy and not “stressful enough” to actually determine anything. One thing this test accomplished was to give investors and the public more confidence in the financial system in the United States. Banks have increased their capital positions in the last few years.
This test is not a stamp of safety on the financial system, though. What this could signal is a return to dividends and a stock buyback program. Now that the Federal Reserve has given a positive review of their capital plans, they may allow the banks to return to paying dividends and issue a stock repurchase program.
Dividend history and future earnings
Each of these major banks had a dividend payment prior to the economic collapse.
|
Bank Name |
Pre Crash Dividend Growth |
|---|---|
|
Citigroup |
-27% |
|
Bank of America |
42% |
|
Wells Fargo |
-29% |
|
JPMorgan Chase |
16% |
|
Goldman Sachs |
86% |
Both Citigroup and Wells Fargo had growing dividends during 2007 but dropped in 2008. These banks have a history of solid dividends. With increasing earnings and profitability, investors look for a return to dividends.
Citgroup has been steadily increasing their profitability in the last few years. Going in to next year, their earnings are predicted to be $4.60 per share. An additional 12% is expected for 2014. This earnings coupled with a potential future dividend and a stock repurchase make Citigroup a great company to look at.
Bank of America investors can expect a drastic increase in earnings per share in 2013. Analysts expect $1.00 per share in earnings next year with an additional 29% increase going in to 2014.
Wells Fargo has had arguably the most successful and healthy recovery among the major banks. Their earnings have been steadily climbing the last 2 years and 2013 should bring a modest but respectable 8% increase.
JPMorgan has had a near 400% increase in earnings since 2008. But this drastic rise in profitability isn’t expected in the coming years. 2012 earnings per share ended at $5.20. Next year, they should grow by an approximate 5%.
Goldman Sachs had the most aggressive increase in dividends before the crash. The net income has had ups and downs the last few years. Next year may see a drop in earnings per share to $13.58.
The bottom line
Profits and earnings have been on the rise for the most part for each of these banks. With a stamp of approval from the Federal Reserve and a history of strong dividends, investors may see a return to cash disbursement in the near future. Keep an eye out on future earnings and an announcement.
Austin Higgins is the Principal Consultant for Build. Invest. Grow. and focuses on building businesses through innovation, growth and investment. Learn more at BuildInvestGrow.com and follow him on Twitter @Austin_Higgins.
Austin Higgins has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
