“Banks! Come back!”
A conversation I had with a client the other day reminded me of the iconic scene from the George Stevens classic western Shane.
As he kept asking me my opinion on the outlook for the dividends (or the return of) of a handful of bank stocks, the little boy’s plaintive wail echoing through the valley as Allan Ladd rides off toward the horizon was ringing in my ears.
At my core, I’m an optimist. However, the realist in me thinks that investors are a bit like Joey: shouting at the back of something that’s long gone.
Since the financial crisis of 2008, banks that took TARP money have been hamstrung when it came to paying dividends. Under the guidelines imposed by the Fed, if banks can meet the necessary capital requirements and have made their required TARP payments, they may once again issue dividend payments.
Last year, Comerica (CMA) cleaned it’s TARP slate with Uncle Sam and announced the return of the dividend. Again, not to throw the proverbial turd in the punch bowl, but don’t expect this to be a regular thing, even from the bigger players like JPM, WFC, BAC, and especially C.
If you’re a financial behemoth and you’re required to maintain a certain level of capitalisation that was higher than when things were loosey goosey from a regulatory standpoint, you’re probably not going to turn into Daddy Warbucks and pass out fivers on the street corner. No. You’d keep your powder dry for two reasons. One: if things got ugly again, you’ve got enough ballast to stay upright. Two: Once you’ve satisfied the liquidity requirements, you can used the cash you have to do growthy things like lend on a big scale or grow the business whether by internal investment or acquisition. Egad! Depending on how and if the business cycle improves, the big banks and the bigger, healthier regional banks may even become, dare we say, growth companies. But if you’re wondering, hoping, that the dividend is coming back one day, stop. It probably won’t, at least not to the level you were used to. Look at the preferreds instead.
There are plenty of them out there. BAC, GS, and MS have some decently rated preferreds trading at 8 to 12% discounts to par and yield 6% or better. A quick survey of a few WFC and JPM issues don’t show much value in our opinion: trading a slight or better premiums. Our favourite undeserved premium is the one on the Regions (RF) Financing Trust III preferred Z. A $133 billion bank that has lost money the last two years (although they turned earnings positive this week…finally), isn’t lending money (how banks typically make money), and is still putting branches up on southeastern street corners? C’mon.
Then there’s Citi. Sliced, diced and julienned, the once venerable giant trades in penny stock territory as it sheds assets here and there. It’s still a recognised, global brand AND they actually made money as announced last week. The flip side is that estimates were exactly half of what the consensus was. But hey! They’re earnings positive. The preferreds might be a better way to speculate. Lots of ’em out there. Some at discounts and decent yields, too. Best of all, though they’ve announced plans to unwind their position, currently around 27%, We the People still own a huge chunk of the business.
Like Shane in the movie, we’re not really sure how wounded the banks really were or still are. We’re just not sure what the ending will be and we’d rather it be somewhat happy.