U.S. bank dividends face a long slog upwards

November 17, 2010

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
By Antony Currie and Richard Beales

A return to boom-time dividends remains distant for investors in U.S. banks. It’s not just that the Federal Reserve is imposing strict criteria, unveiled on Wednesday, before financial firms can return more capital to shareholders next year, including stress-testing their portfolios again. Dividends have also dwindled so badly that they already faced a long slog back.

Banks accounted for almost a third of all dividends paid by S&P 500 companies in 2007. That is set to drop to just 8.9 percent this year, according to Standard & Poor’s. At $18.7 billion, the total expected to be disbursed by financial firms is only around a quarter of the payout three years ago. As a Breakingviews calculator shows, the biggest U.S. banks mostly have an even steeper hill to climb.

Take JPMorgan, which paid $5 billion in dividends in 2007. Chief Executive Jamie Dimon would like to restore the payout to around a third of earnings. That would take it back to around $5 billion — but that’s a six-fold increase over today’s level. And with more shares outstanding now, JPMorgan would have to boost its dividend more than seven times to match 2007’s $1.48 a share.

Wells Fargo would have a slightly easier time. The comparison is somewhat skewed by its 2008 acquisition of Wachovia, but on a simple calculation it would have to boost its dividend by less than four-fold to hit its earlier total dollar payout, and a little more to match its 2007 percentage of earnings.

Morgan Stanley is in a similar situation. But Bank of America has a far bigger mountain to climb. It slashed its annual dividend to just 4 cents a share and has more than doubled its share count. Returning to its 2007 total dollar distribution would take a 111-fold increase, while a whopping 248-fold jump is needed to restore the $2.48 a share paid out that year. Paying out around a third of earnings would require increasing its dividend by a multiple of 35.

Citigroup has that and more to do — the most bailed-out U.S. bank was forced to cut its payout to zero. One firm, though, doesn’t need to do anything: Goldman Sachs, which never cut its dividend. With a quarter more shares outstanding now, that means the Wall Street firm is actually paying out more than in 2007. Admittedly its dividends were always relatively skinny. Even so, its rivals won’t be able to make the same claim for a while.

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