Morgan Stanley’s Dividend Plan Wows Wall Street, While Citigroup’s Disappoints

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Morgan Stanley’s

dividend and stock buyback plans were cheered by investors, while

Citigroup’s

disappointed.

Morgan Stanley’s move to double its quarterly dividend, to 70 cents a share, cheered investors. The stock was up $2.85 in pre-market trading on Tuesday, to $90.55. The new dividend exceeded an optimistic projection of 55 cents from Barclays analyst
Jason Goldberg.
The action reflects growing confidence by the company’s management in its financial outlook.

“The action taken by the board reflects a decision to reset our capital base consistent with the needs we have for our transformed business model,” Morgan Stanley CEO
James Gorman
said in a statement. “In particular, Wealth Management and Investment Management provide stable and durable earnings that support a significantly higher payout ratio.”

Morgan Stanley (ticker: MS) bought E*Trade Financial in 2020 to expand its retail brokerage business and closed on its purchase of asset manager Eaton Vance earlier this year.

The new Morgan Stanley dividend of $2.80 a share will result in a yield of about 3.1% and produce a payout ratio of about 40% based on projected earnings of around $7 a share in the coming four quarters. Other big banks have dividends in the 2% to 3% range.

Morgan Stanley’s dividend is one of the highest among its peers and so is its projected payout ratio. Morgan Stanley also was one of the few big banks to lay out stock repurchase plans, saying it plans to buy back $12 billion of stock over the next 12 months, above the consensus of $11.25 billion. Between its buyback and dividend, Morgan Stanley could return 10% of its current market value to shareholders in the coming year.

In contrast, Citigroup (C) said it would have a dividend of “at least 51 cents a share,” It now pays 51 cents a share. Citigroup had been expected to boost its dividend to 54 cents from 51 cents so its announcement to pay at least a dividend of 51 cents a share surprised Wall Street.

“The dividend was clearly a disappointment relative to expectations,” says Michael Mayo, banking analyst at

Wells Fargo.

“But Citi made it clear that it wants to put every incremental dollar into stock buybacks with the stock at such an inexpensive price. I think that’s 100% the right move.”

Citi is the only major bank trading below tangible book value. The stock was off 41 cents in premarket trading to $71.10, below tangible book value of around $75 a share.

“Citi should be selling the silverware in the dining room, the artwork, and the potted plants to buy back stock,” Mayo said.

Mayo said banks now have greater flexibility on dividends and buybacks under Fed rules and many chose not to target a specific level of buybacks in the coming year to give themselves flexibility.

“We look forward to continuing with our planned capital actions, including common dividends of at least $0.51 per share, and to continuing share repurchases, which are particularly attractive when our stock price is below tangible book value per share,” CEO
Jane Fraser
said in a statement. Citi already has one of the higher yield among its peers at about 2.9%

In other notable actions,

Goldman Sachs Group

(GS) boosted its dividend by 60%.Goldman’s move to boost its dividend to $2 a share from $1.25 a share was in line with Goldberg’s estimate, but above the consensus. Goldman shares have reacted favorably with the stock up over $5 in pre-market trading, to $374.

Goldman dividend yield is 2.1%. The firm is taking a more conservative tack than Morgan Stanley with a payout ratio in the low 20s based on projected earnings.

Wells Fargo (WFC) doubled its dividend, to 20 cents from 10 cents, resulting in a yield of 1.7% with the stock around $46. The new dividend brings the bank only part of the way back to its old payout of 51 cents a quarter, which was slashed last year.

Like Citi, Wells Fargo is emphasizing its stock buyback with a planned $18 billion over the next 12 months.

Industry leader

JPMorgan Chase

(JPM), as expected, increased its dividend to $1 a share per quarter from 90 cents. At $154, its shares yield 2.6%. Bank of America (BAC) said it planned to lift its quarterly payout by 17% to 21 cents a share, in line with expectations. Its shares will yield 2% based on its closing price Monday of $41.56.

Major banks announced new dividends and some laid out buyback plans for the next 12 months in announcements after the close of trading Monday. The Fed had asked banks to wait until after 4:30 p.m. Monday to reveal their new dividends.