Buying back stocks is a 'horrible' thing for banks to do: Analyst Dick Bove

  • Stock buybacks may be on the rise, but noted analyst Dick Bove warned that is something banks shouldn't be doing.
  • "It's like an oil company giving away oil for stock. You don't do it," he says.
  • Overall, he's bullish on the banking sector: "The banks are entering a so-to-speak golden age."

Stock buybacks may be on the rise, but noted analyst Dick Bove warned that is something banks shouldn't be doing.

"I am a big believer that buying back stock is a horrible thing to do for a bank. It's like an oil company giving away oil for stock. You don't do it. You don't give away capital for stock either if you are a bank," the chief strategist at Hilton Capital Management said on "Closing Bell" Friday.

Public companies are expected to return more money to shareholders this year in the form of stock buybacks and dividend increases. Through the end of April, S&P 500 companies are on track to give back a record $1 trillion to investors, according to S&P Dow Jones Indices.

After passing the Federal Reserve stress tests last June, several big banks announced plans to buy back more of their stock.

Bove said the theory is since the big banks can't grow larger, they can give away capital.

"I don't believe that's true," he said. "We're looking at a period where the need for money is going to grow exponentially at a time when the availability of money is declining."

That's because there is now a "massive change" going on in the financial industry, he explained.

"For the last 20, 25 years if you wanted money it was there," Bove said. "Now money supply is not growing. It's not growing because the Fed is shrinking its balance sheet."

The Federal Reserve is now in the process of winding its $4.5 trillion portfolio, known as its balance sheet. It consists mostly of government debt accumulated in the years after the financial crisis.

Overall, Bove is bullish on the banking sector, which has seen a strong first-quarter earnings season.

"The banks are entering a so-to-speak golden age in which they are going to be able to earn consistent increase in earnings, unless there's a recession," he said.

"If there's a recession, they're dead. Without that, I think the earnings are in a big upturn."

He specifically likes the smaller-cap banks, which are "just killing" the big banks in terms of stock performance.

In fact, from 2000 to 2017, mid-cap bank stocks were up 20 percent a year on average, while the biggest universal banks were down, Bove said.

"There's no comparison whatsoever."

His top picks include Silicon Valley Bank, which he calls a "huge winner," and Pinnacle Financial.

— CNBC's Fred Imbert and Jeff Cox contributed to this report.

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