Windfall of big bank dividends point to more shareholder return

The large banks are raining dividends on their shareholders after getting a clean bill of health from the Federal Reserve. And bank analysts say the windfall of capital returns is only just beginning.

Last Thursday, the Fed cleared all 23 large banks tested in its annual stress exercise, which examines each firm’s ability to withstand a hypothetical severe recession.

Facing a real recession last year, the Fed imposed restrictions on dividends and share buybacks at the large banks to preserve capital. But the stress test results last week convinced the Fed that it could lift those temporary restrictions.

As a result, several banks on Monday afternoon announced increases in their dividend plans.

Morgan Stanley (MS) and Wells Fargo (WFC) both doubled their dividends (to $0.70 a share and $0.20 a share, respectively). The nation’s largest bank, JPMorgan Chase (JPM) increased its dividend to $1.00 per share from $0.90 per share.

Michael Brown, an analyst at Stifel company KBW, said in a note Tuesday that the dividend increases were better than expected across the board, adding that capital return should “remain elevated over the intermediate-term.”

Mike Mayo, a senior analyst at Wells Fargo, told Yahoo Finance prior to the stress test results that he was projecting large-cap banks to deliver $127 billion in capital this year, compared to $63 billion in 2020.

RBC Capital Markets analyst Gerard Cassidy similarly said the banks could have more room to run.

“The large banks’ capital levels remain strong and investors should continue to expect that any excess capital that cannot be redeployed into growing the companies’ core businesses either organically or through acquisition will eventually be returned to shareholders,” Cassidy said in a note Tuesday.

Banks are set to report earnings for the second quarter beginning July 13.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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