Big Banks To Boost Dividends

By Greg Sushinsky | December 14, 2010 AAA

Some of the nation's biggest banks announced they would raise their dividends, pending federal approval, while others intend to raise dividends next year. Many of the major banks slashed or suspended their dividends in the wake of the 2008 financial crisis and are now eager to increase payouts. It's a sign the economy is improving and the banks are feeling better about their prospects. (For related reading, see The 2007-08 Financial Crisis In Review.)

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The Dividend Crowd
JPMorgan Chase
(NYSE:JPM), Wells Fargo (NYSE:WFC), and PNC (NYSE:PNC) all announced they would increase their dividends shortly. Bank of America (NYSE:BAC) intends to do so next year. Many of these banks drastically cut their payouts after the subprime mortgage explosion kicked off the financial crisis that swirled through the banking world. When BAC received federal TARP money it slashed its payout drastically. Bank of America had paid out 64 cents in its quarterly dividend in 2007, but cut its payout to a nominal penny in 2009. BAC saw its earnings slide into the red that year; it's had a hard road back.

Major Banks Differ
While the dividend increase news looks good on the surface, investors should remind themselves that each of these banks is different. Bank of America's ongoing exposure to the mortgage crisis, that morphed into the foreclosure crisis, is real. Wells Fargo, which felt it was in reasonable shape at the time, felt forced to take TARP money and cut its dividend. Citigroup (NYSE:C), the billboard for the banking crisis, had such extensive problems that its survival was initially in question. It suspended its dividend in the second quarter of 2009 as just one part of its extreme remedies. The government took a large stake and control via TARP, which it has been divesting. Citi is not as far along as the other banks toward restoring its dividend.

A Couple of Standouts
Amid the banking wreckage there were still a couple of standouts. JPMorgan Chase posted annual earnings per share of $1.37 in 2008, $2.25 in 2009 and already surpassed that in fiscal 2010 by earning $2.87 through its first three quarters. It's looking to raise its annual dividend as well. PNC, which became a super-regional during the crisis, has also fared well. Wells Fargo's earnings have shown signs of a rebound starting.

Hidden Cautions
Dividend payouts are made from earnings in the best of worlds and other cash reserves when necessary, so it pays to watch the earnings and even payout ratios closely. Bank of America, which swallowed the mortgage mess Countrywide made, along with some other heavy mortgage players, may eventually be on the hook for possible litigation regarding mortgage backed securities. BAC, which recently resumed foreclosures, has had a rocky earnings picture. Its balance sheet is still highly levered, even for the banking business, at $540 billion in long-term debt. A negative event could find the company pressured.

The Bottom Line
Cautions noted, it's a positive sign for the banks' futures that they are willing and, more importantly, may be able to undertake dividend hikes. Remember when bank stocks were held for income? Investors should proceed prudently, locking onto the banks with stronger fundamentals.

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