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Every year, investors eagerly wait for capital allocation from the companies they hold positions in. Capital allocation can happen through dividend payouts, buybacks, and issue of bonus shares, among others.
Among these, dividend is one of the most common allocations , as other two have the potential to disturb the company’s ownership pattern. Such is the importance of dividend for the shareholders that it has led to tussles between promoters and management in some of the high-profile companies that we know of. While investors want dividend as a regular income, the management, being highly growth-oriented, usually tries to avoid it as that cash can be used to foster further growth.
To avoid this conflict, more and more companies are coming out with transparent capital allocation policies.
What is dividend?
Small businesses have small capital requirements. But once capital needs begin to grow, the companies start getting listed on exchanges, cornering excess funds and savings from public. In light of humungous capital needs, the company’s ownership is broken into multiple small parts to be bought by shareholders. Since shareholders are kind of owners of the company, they have a right over the profits of the company. The profit, when distributed among shareholders on a pro-rata basis, is called dividend. In shortest possible explanation, dividend is a portion of profits distributed by a corporation among its shareholders.
So, Monday came as a bonanza to many investors across the globe as the biggest of the US banks announced their plans to pay investors cumulatively an extra US$2 billion of dividends next quarter.
Who announced what?
Here is what these American banks have already announced:
Morgan Stanley (NYSE:MS): The bank’s dividend push was most aggressive of them all. The bank said that it would double its dividend to 70 US cents a share in the third quarter of 2021. Additionally, the bank would buy up to US$12 billion of its own stock until June 2022. “Morgan Stanley has accumulated significant excess capital over the past several years and now has one of the largest capital buffers in the industry,” CEO James Gorman said.
Bank of America Corp (NYSE:BAC): The bank said it will increase its dividend by 17% to 21 cents a share, beginning in the third quarter of 2021. The bank has, earlier in April, announced a US$25 billion share buyback plan. “Our decade-long focus on responsible growth has put us in a strong position to support consumers, businesses and communities while delivering for shareholders,” said Bank of America Chairman and Chief Executive Officer Brian Moynihan, while announcing the hike in the dividends.
Goldman Sachs Group Inc (NYSE:GS): One of the most high-profile banks across the globe, Goldman Sachs announced that it has planned on increasing its dividend by 60% to US$2 per share – an announcement that would be subject to approval from the bank’s board. “The planned increase in our dividend demonstrates our confidence in the increasing durability of our franchise revenues and is consistent with our capital management framework of prioritizing investment in our client franchise and returning excess capital to shareholders,” said Bank’s Chairman and CEO David Solomon.
JPMorgan Chase & Co (NYSE:JPM): The only Wall Street bank that is counted amongst the world’s five largest banks, also said that it would be increasing its dividend payout to US$1 per share from earlier US$0.90 cents per share – an increase of 11%. “The Board’s intended dividend increase represents a higher level of sustainable capital distribution to our shareholders, thanks to the combination of strong financial performance and consistent investment in our businesses,” said Jamie Dimon, Chairman and CEO of JPMorgan Chase – arguably the most conservative banker on the Wall Street.
Wells Fargo & Co (NYSE:WFC): The San-Francisco based bank has also said that it will double the common stock dividend to US$0.20 per share from US$0.10 per share. “The expected increase in our dividend is a priority, and our plan contemplates it will continue to increase as we grow earnings capacity, subject to future stress test results,” said CEO Charlie Scharf.
Citigroup Inc (NYSE:C): The bank did not commit to any rise in its dividend payout as its stress capital buffer requirement will increase this year – increasing the chances of truncated ability to boost capital return. “We look forward to continuing with our planned capital actions, including common dividends of at least $0.51 per share, and to continuing share repurchases, which are particularly attractive when our stock price is below tangible book value per share,” Jane Fraser, Citi CEO said.
What’s behind this dividend rush?
Last week, the American central bank – Federal Reserve – announced that all 23 US banks had passed the 2021 stress test. It also said that the industry was “well above” required capital levels in a hypothetical economic downturn. While the institutions would post US$474 billion in losses in this scenario, the back-up capital would still be more than double the minimum required levels. The test helped the American banks emerge out of the shadow of pandemic. The increase in the dividends comes after the Fed loosened restrictions on payouts to shareholders, which were imposed during the COVID-19 pandemic.
