Shares of Citigroup (NYSE: C) plunged 5.4% on nearly quadruple the average daily volume Thursday after the Federal Reserve rejected the bank’s plans to return more capital to shareholders via increased dividends and share buybacks.
Given Citi’s status as a top-10 holding in at least 15 financial services exchange traded funds, the once encouraging expectations for bank ETF dividend increases have been dialed down. Prior to the release of the Federal Reserve’s CCAR results, research firm Markit “projected bank dividends would grow 49% in 2014, based on 23 of the subject banks within our forecasting universe,” but Markit now expects 2014 bank dividends to rise 36%.
Not surprisingly, Markit said the reduced expectations are due in large part to Citi, which the research firm had previously forecast would boost its payout by 400% this year. [ETFs for Rising Bank Payouts]
Still, the new is not all bad for financial services ETFs. For example, it is impossible to argue that the news from the Fed will not be constructive for investors in the iShares U.S. Regional Banks ETF (NYSEArca: IAT). [Bad News for Citi; Watch These ETFs]
Based on Markit data, either confirmed or estimates, several of IAT’s top-10 holdings have either announced or expected to announce substantial dividend increases. On a percentage basis, the average dividend hike from SunTrust (NYSE: STI), Regions Financial (NYSE: RF) and Keycorp (NYSE: KEY) is over 61%. Those three banks combine for about 12.4% of IAT’s weight.
More modest increases, but increases nonetheless, are coming from U.S. Bancorp (NYSE: USB), Fifth Third (NasdaqGS: FITB) and Comerica, a combined 27% of IAT’s weight.
As Markit notes, the Fed was reluctant to approve payout ratios in excess of 30%, but a few banks got permission to exceed that level, including U.S. Bancorp, Wells Fargo (NYSE: WFC), Northern Trust (NasdaqGS: NTRS) and M&T Bancorp (NYSE: MTB). J.P. Morgan Chase’s expected payout ratio is 27%, though it would have been higher if not for a reduced share count via an existing buyback plan.
Banks with 30% payout ratios or higher combine for over 20% of the Financial Select Sector SPDR’s (NYSEArca: XLF), indicating that although XLF and rival ETFs usually feature Citi among their top-10 holdings, the overall dividend outlook is improving for these funds. [Rotating Through Strong Sector ETFs]
iShares U.S. Regional Banks ETF