It's Time for the Big Bank Payback

05/21/2013 7:00 am EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

We rescued some of the nation's largest banks, and soon they will return big money to shareholders in the form of stock buybacks and dividend hikes. Here are six stocks to own in your 'payback portfolio," writes Michael Brush of MSN Money.

We bailed out the banks five years ago. Now that they're getting better, it's payback time. And I want to be invested in the banks that'll be paying us back the most.

The banks, of course, long ago returned the bailout money, with interest. So when I say "payback time," I'm talking about all the loot they'll be handing over to shareholders now that they're getting stronger-thanks to our bailouts.

That money will be arriving in the form of markedly higher dividends and stock buybacks. Either way, shareholders will benefit handsomely.

Here's my payback six-pack—a short list of six banks for a "payback portfolio." These banks may be returning the most money to shareholders over the next three to five years.

The three biggest banks that got the most taxpayer support should be the core of any payback portfolio. This means Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM).

As taxpayers, we basically saved the first two. So, why not own their stocks now for payback?

JPMorgan Chase might have survived without help, since it was more cautious going into the credit meltdown. But the bailouts did help. So did a government-endorsed takeover of troubled Washington Mutual, which gave JPMorgan a whole new branch network at a good price.

As for the smaller banks, the pickings aren't as easy, since many of these banks are much further along the road to recovery. This means there's less room for dividend hikes and share buybacks. It also means their stocks aren't as cheap. But I'd go with Capital One Financial (COF), SunTrust Banks (STI), and Regions Financial (RF).

Sure, these banks face some big challenges. Low interest rates mean skimpier profits on loans. And loan growth is not exactly robust, at about 4% in the first quarter.

But the banks have been trimming costs and improving their financial strength—and that leaves room to start giving back a lot more money to shareholders. Citigroup, Bank of America, and JPMorgan Chase alone will return $55 billion to $80 billion over the next three years, says Patrick Kaser, a value manager at Brandywine Global Investment Management.

Investors looking for income should be happy with banks, as they continue to raise dividends. But don't be surprised if a lot of the capital return comes in the form of share buybacks, since this is the method preferred by the Fed, says Credit Suisse analyst Moshe Orenbuch.

The Fed likes buybacks because they provide more flexibility. Banks can dial them back, if need be, without spooking investors too much. In contrast, dividend cuts can hurt stocks.

To read the rest of this article, including Michael's detailed look at each of the six banks, click here...

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