State Street Playing Safe With Plans To Return $2 Billion To Shareholders

Late last week, State Street (NYSE:STT) announced plans to buy back shares worth $1.4 billion between now and the end of June 2017 while also hiking common share dividends by 12%. ^[1] Given the firm’s roughly 400 million outstanding shares, this represents an intention to return $2 billion to investors over the next four quarters.

Notably, this is about 15% lower than the almost $2.4 billion that State Street sought to return to shareholders as a part of its capital plan for 2015 – making State Street the only major bank to earmark a year-on-year lower amount for investors. The reason behind this is most likely the slow pace at which the bank’s capital base has been building over recent years compared to other large banks. This is because weak revenues and higher operating costs have depressed State Street’s earnings for several quarters now. To put the impact of this on the company’s capital ratio in perspective, State Street aced the stress tests for 2014 with the highest core Tier 1 common capital ratio figures among the 30 banks tested, but it slipped to the 7th spot among the banks tested in 2015 as well as 2016. In light of this, as the Fed could have potentially rejected a plan to return more cash to investors, State Street clearly played it safe while submitting its 2016 capital plan.

We are currently in the process of updating our $65 price estimate for State Street’s stock.

See our full analysis for State Street here

State Street raised its dividend at least once a year between 1995 and 2001, with the frequency doubling from 2001 to 2008. ^[2] But as evidenced by the table below, State Street historically has not returned a lot of cash to investors. The bank handed out less than $400 million in dividends at its peak dividend rate in 2008. After maintaining quarterly dividends at a token 1-cent-a-share over 2009-2010, State Street gradually increased the figure to the current level of 34 cents per share.

The table below summarizes State Street’s capital return figures for each year since 2007, and has been compiled using figures reported in annual reports:

State Street’s focus on returning money to investors in recent years is demonstrated by the fact that the custody bank has repurchased more than $7.3 billion worth of shares over 2011-2015. As a direct result, the average number of its outstanding shares has fallen 20% from almost 500 million in 2011 to under 400 million now.

As State Street paid 34 cents in dividends per share over the first two quarters of 2016, and proposes to pay 38 cents per share over the remaining two quarters, total dividends for the year should be $1.44 per share. This works out to total dividends of around $575 million for the year, assuming the total number of shares outstanding remains constant at the current level of 400 million (although the figure will continue to fall due to share repurchases). Also, the bank repurchased $325 million in shares over Q1 2016 and had authorization in place to repurchase an additional $455 million for Q2 2o16 – taking the total repurchase figure over the first half of the year to $780 million. Taken together with $700 million in proposed purchases for the rest of the year (half of the total proposed repurchases of $1.4 billion), this points to total share repurchases of just under $1.5 billion in 2016.

We represent these payouts in our analysis of State Street in the form of an adjusted dividend payout rate shown in the chart below. As this payout rate was not meaningful in 2009, we represent it in the chart as 0%.

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1. State Street Corporation Announces an Intention to Increase Its Quarterly Common Stock Dividend to $0.38 per Share and an Authorization to Purchase Up to $1.4 Billion of its Common Stock, State Street Press Releases, Jun 29 2016 [↩]
2. Dividend History [↩]