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The Federal Reserve on Wednesday released the results of its latest round of stress tests of U.S. banking operations, approving capital plans at all but two of the participating banks. That means these institutions received approval to return more capital to shareholders in the form of dividends, buybacks, or both.
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Here are the details of some of the major banks' plans and what they mean for you.
Why do we have the stress tests?It may seem a little silly that the government needs to tell the banks if and when they can return more of their capital to shareholders, but it's for a good reason. Basically, the Fed wants to know that in the event of another economic storm (like we saw in 2008), there won't be a need for further government bailouts.
The stress tests are meant to determine how banks would fare capital-wise during a hypothetical recession, which the Federal Reserve defines as a 10% unemployment rate, a 25% drop in home values, a 60% drop in the stock markets, and oil prices of $110 a barrel. The first round of stress tests -- the results of which were announced last week -- simply determined whether the banks' capitalization would remain over the minimum levels set by the Fed. All 31 banks tested passed this portion of the review.
The second round is the more thorough examination -- and the most important to shareholders, as the Fed evaluates each bank's capital plan and decides whether to give the bank the green light to return more capital to its shareholders.
So which banks are increasing their dividends?Most of the banks with approved capital plans will increase their dividends. One of the most notable is Citigroup , which had its capital plan rejected last year and has seen its dividend stuck at $0.01 per share per quarter for some time now. Shareholders will receive a seemingly tiny raise to $0.05 per share, but the crucial development here is that the Fed is essentially saying Citigroup is finally starting to get things right.
Many of the other major U.S. banks are also increasing their dividends, including Wells Fargo, Goldman Sachs, JPMorgan Chase, Morgan Stanley, US Bancorp, American Express, Fifth Third Bancorp, PNC, Capital One, and SunTrust.
It's not all about the dividendsIn addition to dividends, increased share buybacks are also worth shareholders' attention.
Stock repurchases make the company's remaining outstanding shares more valuable, as each one represents a larger portion of the business. For example, if a company is valued at $100 million and there are 10 million shares outstanding, each share is worth $10. If the number of outstanding shares drops to 9 million, each share is now worth more than $11.
You'll notice that Bank of America was absent from the discussion of dividend increases; the company is instead initiating a $4 billion buyback.
When you're looking at a company's capital plan, share buybacks can be just as important to your bottom line. In fact, many shareholders actually prefer buybacks to dividends because you don't have to pay the dividend tax on the capital that was returned to you.
How much are we talking about?Now for the numbers. Here's a reference chart to break down the major banks' plans to return capital to shareholders, as announced after the stress test results.
Note: Percentages are based on the share price as of March 12, 2015. Blank spaces do not mean the bank does not or will not buy back shares; it simply means no new buyback amount was announced on March 11.
As you can see, many of the bank stocks should return substantial amounts of capital to shareholders in 2015. And one thing is for certain: The banking industry has come a long way (admittedly, forced by the government) since the financial crisis.
The article These Stocks Will Raise Their Dividends in 2015 originally appeared on Fool.com.
Matthew Frankel owns shares of American Express and Bank of America. The Motley Fool recommends American Express, Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of Bank of America, Capital One Financial., Citigroup Inc, Fifth Third Bancorp, JPMorgan Chase, PNC Financial Services, and Wells Fargo and has the following options: short April 2015 $57 calls on Wells Fargo and short April 2015 $52 puts on 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.
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