American banks are using some of their vast capital to better remunerate shareholders.
It’s been an eventful summer for companies on the stock exchange, so even an active investor could be forgiven for missing a major event in the financial sector — this year’s version of the annual U.S. bank stress tests. For those who might be unfamiliar, these are a series of theoretical exercises aimed at judging whether a bank would be able to withstand severely adverse economic conditions. The tests are conducted by the Federal Reserve, in cooperation with each bank’s risk-management team.
Over the past few years, the banks required to undergo the tests (i.e., the ones with over $50 billion in assets) have generally passed with flying colors. Happily for income investors, by proving that they have more than sufficient capital, these companies have the scope to declare fresh dividend raises. 2024 was no different; here’s a look at the payout boosts of exactly half of the so-called Big Four American lenders, Bank of America (BAC 0.57%) and Wells Fargo (WFC 1.70%).
A bargain at the top of the banking sector
Less than a month after the stress test results were released, Bank of America formally declared that its new quarterly payout is to be $0.26 per share. That represents a 8% increase from the previous dividend.
And why not? The monster bank continues to hum along, posting bottom-line profits that are well in the billions of dollars. Its second quarter figures revealed a 1% year-over-year bump in total revenue to over $25 billion. That beat the average analyst estimate. The rise was on the back of higher fee income in such lucrative segments as investment banking and asset management. Total deposits also rose, by 2%, as did loans and leases, up nearly 1%.
Net income actually fell during the period, sliding to $6.9 billion from the second quarter 2023’s $7.4 billion. Still, the result topped the consensus prognosticator expectation.
Despite the bank’s continued success and that enhanced dividend payout, investors have been cold on it since a 34 million-share sell-off enacted by Warren Buffett’s investment vehicle, Berkshire Hathaway, in the space of one July week. Where Buffett goes, many investors follow.
I don’t think anyone should take this as a Buffett prophecy that Bank of America’s entering a tough period. We have to keep in mind that Berkshire’s position in the lender was immense; in fact, after that sale the company still held approximately 999 million shares of the lender. This hardly feels like a panic sale, then. Meanwhile, the economic cycle continues to favor banks in general and this one in particular. We might even see a nice bounce if the Federal Reserve, as widely speculated, soon cuts its key interest rate.
Bank of America’s dividend raise will take effect with its upcoming payout, slated for Sept. 27 for investors of record as of Sept. 6. At the most recent closing share price, the new distribution would yield 2.7%.
Is Wells well?
As Buffett was counting the mountains of cash generated by Berkshire’s Bank of America sale, Wells Fargo — incidentally a one-time favorite stock of the master investor — was declaring its own dividend raise. The company’s quarterly disbursement is getting a bigger increase than that of its rival, with a 14% increase to $0.40 per share.
As with Bank of America, investors weren’t blown away by Wells Fargo’s second-quarter performance.
The bank beat on both revenue, up marginally to $20.7 billion, and profitability, down marginally to $4.9 billion. Yet the beats weren’t convincing enough to start a bull run on the shares. Plus, a 9% year-over-year decline in net interest income, a key metric for banks, worried some observers and investors, even though that isn’t all that surprising in the current environment of relatively high interest rates. Those folks might also have been concerned about the flatlining deposits figure, and the dip in total loans.
Yet there were numerous reasons to be bullish about Wells Fargo’s future. As with Bank of America, the lender will get a break with its cost of funding when the Fed pulls the lever on an interest-rate cut — or cuts, as the more optimistic are anticipating. All things being equal, it should also see a consequent rise in demand for loans.
And it’s doing a good job lately of boosting the take for investment banking, with earnings leaping 38% higher year over year to $430 million. That’s only a drop in Wells Fargo’s bucket for now, but perhaps this will turn into something of a stream in the future. It’s worth keeping an eye on.
Stockholders with positions in Wells Fargo will receive the new dividend on Sept. 1 if they were owners as of Aug. 9. The raised dividend yields a theoretical 3% at the bank’s most recent closing share price.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.