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7 Bank Stocks With Dividends Set to Increase

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Retail investors used to have a lot of love for bank stocks and for good reason: these companies offered meaty dividends for income-hungry Americans.

Of course, then the financial crisis struck and banks cut or killed those sought-after cash payouts. Bank of America cut its quarterly dividend in half (from $0.64 per share to $0.32) in October 2008, before cutting it again to $0.01 per share in January 2009. Citigroup discontinued its dividend altogether in February 2009.

But today, banks are eager to reinstate their dividends and they might soon win approval: The top 19 banks have undergone another round of stress tests and could get the green-light from the Federal Reserve to raise their dividends.

With that in mind, Morningstar analysts recently gave the once-over to a number of top banks to determine which of these financial firms could immediately increase their dividend, what a normalized dividend rate might be, and what that implies for future yields.

Here are their conclusions:

Wells Fargo - with its massive earnings power - should sail through the most recent stress test and increase its $0.05 quarterly dividend to something in the range of $0.25 per share, which would represent a 22% payout ratio. Morningstar expects the company to eventually reach 35%, which while below its historical long-term average, would have Wells Fargo paying around $0.35 per quarter by 2014, slightly above where it was before the firm cut its dividend in March 2009.

Management of Bank of New York Mellon points out that it “finished number one in the 2009 stress test” and expects to easily pass again this year. Morningstar predicts the bank will announce an increase in its quarterly dividend to $0.33 per share, representing about a 40% payout ratio for 2011.

In the near term, Morningstar expects J.P. Morgan to raise its quarterly dividend to something on the order of $0.20 per share. In the long run, the analysts think that the bank will raise its dividend payout ratio to about 35%, which would imply a $0.60 per share quarterly dividend by 2014.

Bank of America has finally laid out a path toward more normalized earnings and even applied to the government for a dividend raise in the second half of 2011. Even though Bank of America will not be one of the first banks to raise its dividend this year, Morningstar expects the company’s current penny per quarter dividend to reach a dime before the end of 2011.

With a 2010 payout ratio of just 12% supporting its $0.05 quarterly dividend, Morningstar thinks that U.S. Bancorp will likely raise its dividend to somewhere between $0.15 and $0.20 per quarter by the end of March. The analysts say that they could easily see U.S. Bancorp starting with a $0.15 quarterly dividend in the second quarter, then raising it to our $0.20 target a few months later. After that, they believe that the bank’s dividend growth will be fairly muted, as its fundamental earnings growth is masked by the end of loan loss reserve releases in 2013 and 2014.

Citigroup has suggested it will not return capital to shareholders until 2012 and Morningstar analysts don’t anticipate anything different. Citigroup will have plenty of capital to disburse to shareholders when it finally decides to do so and analysts think the bank eventually will reinstate a dividend policy with around a 40% payout ratio. However, they also think it will likely take decades before Citigroup can return to pre-crisis dividend levels.

Morningstar believes that PNC has room to increase its dividend from $0.10 per share per quarter to $0.20-$0.25 per share before the end of the year. This would leave its payout ratio still at a relatively low 15%-20%, giving it more room later on to increase its dividend significantly. By 2014, the analysts believe a 30% payout ratio would net investors $0.62 per share per quarter.

BB&T only cut its dividend to $0.15 per share (from $0.47 in May 2009), remained profitable every quarter during the crisis, and now is trying to increase a dividend that represents a 50% payout ratio already when the Federal Reserve seems to be guiding firms closer to 30%. Consequently, Morningstar doesn’t think it will be one of the first banks to announce a dividend increase this year, but will have to wait until the second half of 2011. The analysts see the quarterly payout closer to $0.20 per share by the end of the year.
POSITION:  No positions in stocks mentioned.