Bank ETFs Could Benefit From Higher Bank Dividends

The results of the Federal Reserve’s Comprehensive Capital Analysis and Review, or CCAR, are soon to be released and that could mean higher dividends and increased share repurchases for a slew of domestic banks.

Those themes could benefit exchange traded funds, such as the Invesco KBW Bank ETF (NASDAQ: KBWB), SPDR S&P Bank ETF (NYSEArca: KBE) and the Financial Select Sector SPDR (NYSEArca: XLF).

For investors, the good news is bank stocks’ fundamentals are improving, risks with the group are declining and valuations are low.

“Large bank stocks could go still higher, boosted by double-digit dividend increases expected to be authorized under the Federal Reserve’s Comprehensive Capital Analysis and Review, or CCAR, according to analysts at JPMorgan,” reports Lawrence Strauss for Barron’s.

Healthy Dividend Increases

Since the end of the global financial crisis, during which many stocks were egregious dividend offenders, the financial services sector has been a leader in terms of domestic dividend growth. That trend is expected to continue.

“The JPMorgan analysts—Vivek Juneja, Jonathan Summitt, and Andrew Dietrich—expect the dividends of 13 banks to increase by 16% on average,” according to Barron’s. “They predict that the payout ratio—the percentage of earnings paid out in dividends—will rise to 37% from 34% currently as the Fed informs banks of the results of its reviews, starting July 1.”

Payout ratios, particularly for large money center banks, are expected to remain low, giving banks more room to continue boosting payouts going forward.

“Payout ratios will vary depending on the size of the banks,” reports Barron’s. “The analysts expect ratios at the large regional banks to be 35%-40%, but 20%-30% for the money-center banks. The latter group has ‘a greater proportion of revenues that are markets-related and hence more variable,’ according to the research note.”

Investors in bank ETFs should also expect to see banks in those funds up share buybacks.

“Besides healthy dividend increases, the analysts expect share repurchases to rise as well. The median total amount of capital returned to shareholders will go up by 15%, they predict,” notes Barron’s.

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