It’s Dividend Watch Time for Big Banks

03/12/2012 4:40 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

If the Fed allows the dividend hikes these banks are asking for as part of the latest round of stress tests, the financial sector could get a nice boost, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

The US Federal Reserve will make big headlines this week—just not at tomorrow’s meeting of its Open Market Committee.

The Fed body that sets short-term interest rates is expected to leave rates just where they are, at 0% to 0.25%, and put a damper on whatever hopes for a third round of quantitative easing the financial market may still have.

In other words, business as usual Tuesday. But Thursday is a very different matter.

That’s the day when the Federal Reserve is scheduled to announce the results of its annual stress test on US banks. The Fed is expected to give the go-ahead for big dividend increases at banks that cut their dividends after the Lehman bankruptcy, and have been prohibited from raising dividends back to former levels since then by Fed rulings that they hadn’t built up capital reserves to withstand another financial crisis.

Dividends at the 19 largest US lenders will climb 30% in 2012 from 2011, according to Wall Street estimates. The biggest jumps, analysts project, will occur at Wells Fargo (WFC) and Citigroup (C). Citigroup now pays a nominal one-cent quarterly dividend. Wells Fargo’s current quarterly dividend is 12 cents a share, for a yield of 1.75%.

Overall, estimates Barclays Capital, banks (excluding investment banks such as Goldman Sachs (GS) and Morgan Stanley (MS)) will raise their payout ratios from 24% of earnings in 2011 to 48% of earnings in 2012. The dividend yield on the KBW Bank Index is now just 1.8%, about half the 2007 level.

The stress test asked banks to model their capital ratios if unemployment hit 13% and housing prices slumped another 20%.

Bank of America (BAC) will be absent from any Fed announcement. After getting its request to raise its dividend rebuffed by the Fed in the last stress test, the bank didn’t ask to raise its dividend or stock buyback in this round.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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