Just a decade ago, the banking sector was in crisis. Today, sitting on mountains of excess capital, large-cap banks have gotten the green light from regulators to boost dividends and share repurchases. Pursuant to the 2017 CCAR (Capital Analysis and Review) "stress test" by the Federal Reserve, banks received "the strongest increase in capital deployment since the financial crisis," according to Marty Mosby, director of bank and  equity strategy at institutional brokerage firm Vining Sparks IBG LLC, as reported by Barron's

Tax reform, which will increase earnings and cash flow, is another impetus to bigger dividend payouts. Analysts at JPMorgan Chase & Co. (JPM) expect average bank dividend increases of 38% in 2018 and 26% in 2019, for an average two-year increase of 74%. Mosby is more conservative, with respective projections of 25%, 20%, and 50%. An added bonus: bank stocks held up better than the market averages in the recent selloff. 

10 Banks to Watch

According to research by JPMorgan Chase & Co., as reported in Barron's, 10 big banks look especially attractive to dividend-oriented investors. Here they are, with their year-to-date price changes through February 14, current dividend yields as of February 14, and projected cumulative dividend growth through 2019, per JPMorgan Chase:

  • Bank of America Corp. (BAC): +8.4% YTD; 1.5% yield; 126% dividend growth through 2019
  • BB&T Corp. (BBT): +10.1% YTD; 2.4% yield; 38% dividend growth through 2019
  • Citigroup Inc. (C): +3.1% YTD; 1.7% yield; 158% dividend growth through 2019
  • Citizens Financial Group Inc. (CFG): +9.2% YTD; 1.9% yield; 94% dividend growth through 2019
  • Fifth Third Bancorp (FITB): +9.6% YTD; 1.9% yield; 87% dividend growth through 2019
  • PNC Financial Services Group Inc. (PNC): +9.7% YTD; 1.9% yield; 73% dividend growth through 2019
  • Regions Financial Corp. (RF): +12.1 YTD; 1.9% yield; 110% dividend growth through 2019
  • SunTrust Banks Inc. (STI): +8.5% YTD; 2.3% yield; 71% dividend growth through 2019
  • U.S. Bancorp (USB): +3.2% YTD; 2.2% yield; 41% dividend growth through 2019
  • Wells Fargo & Co. (WFC): -1.9% YTD; 2.6% yield; 22% dividend growth through 2019

By comparison, the S&P 500 Index (SPX) is up by 0.9% for the year-to-date, and has a dividend yield of approximately 2.0%, per Barron's.

Relaxed Regulation

Until recently, regulators had forced banks to keep their dividend payout ratios at 30% or lower, Mosby tells Barron's. With the sector returning to health, and regulators approving massive returns of capital to shareholders, these ratios are rising. By 2019, the median payout ratio for the 10 banks listed above will be about 40%, per JPMorgan Chase's projections.

In addition to dividend increases, banks have been buying back their own shares more aggressively. The result, Mosby says, is that large-cap banks now have about 5% fewer shares outstanding than they did two years ago, and this trend is accelerating, with regulatory approval.

Selected Stories

Bank of America was one of the most troubled institutions during the financial crisis, but now profits are growing briskly. JPMorgan forecasts that EPS will rise by 54% in 2018 and by an additional 13% in 2019, for a cumulative increase of 74%. That should provide ample coverage for dividend hikes. In particular, BofA should benefit from expense savings and greater sensitivity to interest rates than many rivals, JPMorgan says, per Barron's.

Citizens Financial has been improving a variety of key metrics. Return on equity has been rising from 5.1% in 2016, to 6.5% in 2017, and to a projected 8.1% in 2018, per JPMorgan and Barron's. The bank's efficiency ratio, which compares noninterest expense to total revenue, dropped from 63.1% in 2016 to 60.2% in 2017, per both sources. 

At the other end of the spectrum, Wells Fargo continues to be plagued by past scandals, as well as slow revenue growth. These scandals include the opening of fake customer accounts, wrongfully force-placing auto insurance on customers, and overcharging military veterans on VA loans. The bill for fines and restitution on these scandals has grown to at least $373 million, per HousingWire.

'Safer Than The Market'

That's the headline of another Barron's story about bank stocks. During the 10.2% correction in the S&P 500 from January 26 through February 8, bank stocks fell by only 8.9%, according to Chris Verrone, a partner at institutional brokerage firm Strategas Investment Partners. In fact, the SPDR S&P Bank ETF (KBE) performed even better, down just 7.1%, per Verrone. This was the first time since the Dotcom Crash of 2000-02 that banks outperformed in a selloff of 10% or more, when the S&P 500 fell by 49.1% and banks declined by 24.2%, as he told Barron's. 

The Investopedia Anxiety Index (IAI) continues to record high levels of worry about the markets among our 27 million readers worldwide. As of the open on February 15, the KBW Nasdaq Bank Index (BKX) was up by 6.6% for the year-to-date, versus 1.5% for the S&P 500, per Yahoo Finance.

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