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By Eric Compton| 7-24-2018 10:00 AM

4 Banks Poised to Deliver Big Capital Returns

We think these banks will see strong dividend growth and improving returns on equity.

U.S. Banks have been on a tear over the last couple years, and with interest rates continuing to rise and regulatory relief already occurring, profits should continue to grow at a fast pace for the industry. Banks also tend to spend a large amount of their income on dividends and share buybacks, which should increase per share numbers even more. We recently published a piece on July 8 titled, "New Regulatory Proposals Will Change Stress Test Landscape," which included our bank capital return projections and a recap of CCAR 2018. Based on these projections we have been able to isolate key winners and losers for dividend growth and improving returns on equity as banks are able to release some of their excess capital.

Today we will cover our three top picks for increasing capital returns and dividends. 

For our first pick, there was a select group of banks which were removed from stress testing completely, which should free them up to return much more capital to shareholders. Among the banks released from testing, we would highlight Comerica. Comerica recently stated on their recent earnings call that they plan to materially increase capital returns to shareholders, which is exactly what we would expect. We then project the bank to continue to grow earnings per share at a double-digit rate through 2020, which should support even more dividend growth over the medium term.

Our second pick is Wells Fargo. Wells has the highest dividend yield among the big four banks, and one of the highest among the banks we cover in general. Further, its shares trade at one of the most attractive valuations among our banking universe. Additionally, we project that the bank should be the least constrained among the big four to return additional capital once new stress test regulations go into place, which, along with improving operating results, should help boost returns on equity. Combine the attractive valuation, the fact that the bank is authorized to repurchase almost 10% of its current market cap, and the bank's high level of common equity Tier 1 capital compared to peers, and we think Wells should offer investors an attractive total return and dividend yield option among the banks.

Our third pick is for those looking for a surprise dividend growth candidate, and for that we've selected Bank of America. Bank of America is currently projected to pay out roughly 20%-21% of 2018 earnings as dividends, which puts the bank on the low end of payout ratios in the industry. Management has talked about eventually getting that ratio up to 30%. While it still may be a few years away, we think it will eventually be possible for Bank of America to reach this 30% payout ratio. An increasing payout ratio, combined with projected double-digit earnings growth over the next couple years, should lead to a nicely increasing dividend for Bank of America shareholders.

Finally, for a bonus pick, we also note that BB&T consistently has one of the highest dividend payout ratios and yields among our banking coverage, and for investors looking for a bank committed to maintaining a consistently high dividend yield, you can’t go wrong with shares of BB&T.

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