Will Goldman Sachs Raise Its Dividend in 2018?

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Wall Street has been on fire in 2017, but the financial industry's success hasn't translated into big gains for Goldman Sachs (NYSE: GS) shareholders. The investment banking giant is one of the few stocks in the Dow Jones Industrials that has fallen year to date, and given that the stock's price is one of the highest in the Dow, Goldman's underperformance has held back the benchmark from even stronger gains than it has actually posted.

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One source of disappointment for Goldman investors has been a lack of commitment to a strong dividend policy. With a yield of just 1.3%, the investment bank's dividend is one of the weakest in the Dow. Moreover, the company has been a bit inconsistent in the timing of its dividend increases lately, raising further concerns about its suitability for income investors. Will the investment bank respond with a healthier increase in the coming year? Let's look more closely at Goldman Sachs to see whether it will raise its dividend in 2018.

Dividend stats on Goldman Sachs

 Metric

Goldman Sachs

Current quarterly dividend per share

$0.75

Current yield

1.3%

Number of consecutive years with dividend increases

7 years

Payout ratio

14%

Last increase

May 2017

Goldman's stinginess with dividends

At first glance, Goldman Sachs' history of dividend payments looks reasonably solid. The stock has paid out dividends throughout its history as a publicly traded company, and its payout has risen more than sevenfold over the course of nearly 20 years. Dividend growth has accelerated since the end of the financial crisis, with six different dividend increases resulting in more than double the payout now that it made in early 2012.

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Yet Goldman's dividend growth has lagged its share-price performance, so dividend investors have never been able to see a big yield from the financial giant. Yields have typically stayed in the range of 0.5% to 1.5% over the past decade and a half, and even the financial crisis-led share-price plunge resulted in only a temporary spike in yields.

Even so, after going through calendar 2016 without a single increase, Goldman finally extended its streak of annual dividend payout increases by making a mid-year hike of 15% in its first-quarter earnings release. The rise sent the quarterly payout to $0.75, and although that only slightly lifted its yield, Goldman nevertheless indicated its ability to keep returning capital to shareholders effectively.

Dividends take a backseat at Goldman

The other thing that happened back in April exemplifies a key reason Goldman isn't known as a dividend stock: The investment bank announced a 50 million share repurchase program worth about $10.8 billion. That represented about 13% of the outstanding share count at Goldman, and it showed the high priority the financial giant puts on buybacks over dividends. Buybacks have some key advantages over dividends, including the fact that they tend to increase the share price rather than lowering it, and that they avoid some of the tax consequences that dividend payments incur for their shareholders.

Moreover, Goldman can scale its buybacks at its own discretion without any adverse perception from the market. Companies that cut dividends, on the other hand, get a kneejerk negative reaction from shareholders, even if the redeployment of capital is otherwise sound.

What's ahead for Goldman's dividend in 2018?

Goldman has shown that it isn't entirely trustworthy in terms of annual dividend growth. Because of the timing of its 2017 dividend increase, Goldman could choose not to make a quarterly boost in 2018 and still claim an extension of its streak, because its annual payments would be larger than what it paid in 2017. That's a definite possibility, especially if the company keeps making such huge buybacks.

There's no doubt that Goldman Sachs has the financial wherewithal to make dividend increases, and a boost to $1 per share would be psychologically significant and signal a change in capital allocation priorities for the bank. Depending on what the Federal Reserve authorizes the investment banking specialist to do, though, Goldman investors should likely anticipate continued buybacks while accepting the possibility of no dividend increase at all during 2018.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.