cnbc.com Meredith Whitney

As bank dividend talk heats up, analyst Meredith Whitney thinks it should cool down.

Implementing dividend hikes now is short-sighted, said Whitney, who spoke in an interview earlier with CNBC.

While banks have done a good job raising cash, they’d be better off putting it to work on overseas acquisitions that would pay off over the long term rather than stuffing it back into investors’ pockets in the short term, she said.

Investors are anticipating the JPMorgan Chase

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[JPM  Loading...      ()   ] earnings call on Friday as a likely bellwether for the dividend trend.

“They have a choice,” Whitney said during an interview in which she spent the bulk of her time defending her highly controversial call on municipal defaults. “They can make strategic acquisitions outside the US, and that would be a big deal for JPMorgan, which I would prefer to see them do. Or they can return money to shareholders or do a domestic deal.”

How banks choose to address the issue is critical for investors going forward as the hundreds of institutions affected by the financial crisis look for a return to normalcy.

Whitney said now is the time to start doing deals.

“That’s something I would herald as a shareholder,” she said. “To me this is the time you make major strategic acquisitions.”

Banks have until Friday to submit capital plans to the Federal Reserve under new requirements that will determine when 700 banks given funds under the Troubled Asset Relief Program can pay dividends.

“They will let the strong pay and the weak follow,” Whitney predicted. “They may not say haves and have nots—‘you can pay, you cannot pay’—they might do it in sequencing.”

Even though the Fed’s stress tests are likely to catch few banks under the 5 percent Tier 1 capital requirements, that doesn’t mean the industry’s problems are over.

“There are some issues that still hang over banks, which (are) housing and commercial real estate,” Whitney said. “Some banks are really well capitalized. There’s some regional banks that have a lot hanging in the balance.”

Pay Me Now

Regardless of Whitney’s admonitions, a slew of big names in banks are expected to begin announcing dividends.

JPMorgan’s CEO Jamie Dimon told CNBC on Tuesday that the bank is likely to pay a dividend up to a dollar once the stress tests run their course.

In a research note, Wells Fargo said it expects similar announcements by the second quarter from PNC Financial, USBancorp and Goldman Sachs.

Barclays Capital said it expects most of the companies in its 26-bank coverage universe to pay, thought it said the expectations likely will be closer to 20-30 percent of earnings rather than the historical norm of 40-45 percent.

“While we expect capital redeployment to be more of a theme this year, we anticipate companies will continue to focus on improving their capital ratios and liquidity profiles,” Barclays Capital analysts said in a quarterly earnings preview released earlier this week.

While it remains to be seen whether Whitney’s admonitions are as prescient as her Citigroup call a few years ago, investors were taking the banks’ side.

The KBW Bank Index was up nearly 1.5 percent in mid-day trading Wednesday, possibly indicating that investors, having had to sit through the stomach-churning ride of the past three years, are looking for some immediate rewards.

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