Whenever Wall Street gets news it expected the risk is always for a selloff, as traders generally price in the development ahead of time and then take profits.
That wasn’t the case, though, with the bank dividend announcements Friday, with investors cheered that some of Wall Street’s biggest names that had been on the hook to the government now will be able to start returning money to shareholders.
In particular, JPMorgan, Wells Fargo, US Bancorp, BB&T and others announced either dividend hikes, share buybacks or both.
The optimism seemed to stem not merely because the Federal Reserve gave its blessings to the institutions, but in what the future holds for large banks under the aegis of the government’s Troubled Asset Relief Program.
“Everybody’s focusing on the headlines about dividends. But what I was looking at was capital raises and their relative size to what they owed to TARP,” said Justin Wiggs, vice president of trading for Stifel Nicolaus in Baltimore. “Those remaining in TARP might be allowed less dilutive capital raises to get out.”
What that means is banks that had been under pressure to increase their capital-to-debt ratios will be able to do it without having to raise as much to get to the 7 percent benchmark the Fed and the Basel III rules established for dividend eligibility.
There will be less inclination, then, for share issues that drive down the price of the stock and more push to start getting money back to investors through dividends and share buybacks.
“One of the things being focused on is it will be a lot easier exiting (TARP) than the market had prepared and was modeling for,” Wiggs said.
As a result, the sentiment was that the move toward dividend hikes for the banks deemed too big to fail during the financial crisis likely might be in only the early or middle innings.
Financials, in fact, led the market rally Friday, zooming nearly 2 percent higher and well ahead of any other sector on the Standard & Poor’s 500.
While the gains weren’t particularly evenly distributed, traders seemed to be buying into what the Fed was selling with the stress tests.
“This is a start. It’s a step in the right direction,” Jill Evans, of the Alpine Dynamic Dividend Fund, said during a CNBC appearance. “We have a formula for dividends. There’s no question that they look a lot better than they did a couple years ago.”
Evans said her fund is likely to go with the old standbys when buying bank stocks.
“We’re just going to be selective and stick with higher-quality names,” she said, citing JPMorgan Chase and Goldman Sachs specifically.
Two of the banks still under the TARP umbrella are Sun Trust and KeyCorp, and their prospects were being watched closely.
Keefe, Bruyette & Woods said it expected the banks to be able to repay TARP funds “relatively soon” and possibly deliver dividends in 2012. That theme of progressing toward dividend payments carried the day Friday and likely will as long as TARP remains in the market lexicon.
“In a nutshell, we think it’s a positive reassurance. It’s just one more piece of good news,” said Ryan Detrick, senior analyst at Schaeffer’s Investment Research in Cincinnati. “It’s not a huge buy signal but we don’t think it’s a major peak or a sell signal.”
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