BNY Mellon Increases Share Buyback Target To $3.1 Billion, Leaves Dividend Unchanged

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Bank of New York Mellon

The Bank of New York Mellon Corporation (NYSE:BK) has secured the Federal Reserve’s approval for plans to buy back shares worth up to $3.1 billion between now and the end of March 2016. [1] The global custody banking giant aced the Fed’s Comprehensive Capital Analysis and Review (CCAR) for banks yet again this year – ranking third among 31 bank holding companies (BHCs) in terms of minimum Core Equity Tier 1 (CET1) ratio under the test’s “severely adverse” scenario. As the two BHCs which ranked higher were Deutsche Bank’s (NYSE:DB) low-risk U.S. retail banking subsidiary and the card lender Discover Financial Services (NYSE:DFS), BNY Mellon stood out as the best capitalized major banking group in the country at the end of the tests.

BNY Mellon’s quarterly dividend payout will remain unchanged at $0.17 per share for the next four quarters. Taken together with the proposed share buyback, this implies that the bank is looking to return as much as $3.8 billion to investors over the next 12 months. This is a good 50% higher than the $2.5-billion capital distribution plan the bank announced after the 2014 stress test (see BNY Mellon’s Plan To Return $2.5 Billion To Shareholders). Investors were clearly happy with the proposal, as they led the bank’s shares 2.5% higher over trading on Thursday, March 12, in response to the announcement.

We are in the process of updating our $40 price estimate for BNY Mellon’s stock in light of its better-than-expected capital return plan.

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See our full analysis for BNY Mellon here


BNY Mellon paid out quarterly dividends of over $0.20 a share between 2005 and 2008, with the figure remaining at its peak level of $0.24 for seven quarters until Q4 2008. [2] As the recession set in and the bank faced losses, the dividend was slashed by nearly two-thirds to $0.09 per share in Q1 2009 and remained at that level until Q1 2011 – when the figure was increased to $0.13 per share. These dividends were maintained for two years, with the bank choosing to return additional cash to investors through share repurchases, until it hiked them to $0.15 per share in Q2 2013. Following the 2014 stress tests, BNY Mellon boosted quarterly dividends to $0.17 a share in Q2 2014. With the bank leaving this figure unchanged, dividends should remain at this level at least till Q1 2016.

The table below summarizes Bank of New York Mellon’s capital return figures for each year since 2005 and has been compiled using figures reported in annual reports:

(in $ mil) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Common Stock Dividends 644 656 884 1,107 599 441 593 623 680 760
Shares Repurchased 417 883 113 308 28 41 873 1,148 1,026 1,669
Total 1,061 1,539 997 1,415 627 481 1,466 1,771 1,706 2,429

At the current dividend rate of $0.17 per share, BNY Mellon will pay dividends of $0.68 per share for 2015. This works out to total dividends of $750 million for the year, assuming the total number of share outstanding remains constant at the current level of 1.11 billion. As for the share buyback program, the Federal Reserve’s approval for the repurchase of shares worth $2.4 billion over the next four quarters is unconditional. BNY Mellon can repurchase common shares worth an additional $700 million (for total buybacks worth $3.1 billion) if it issues preferred stock worth $1 billion over coming months. The Fed’s decision to impose this condition is clearly to ensure that BNY Mellon’s payout to shareholders does not dent its capital position, as the cash raised from the preferred equity more than makes up for the $700 million in extra share repurchases.

We include dividend payouts and share repurchases in our analysis of BNY Mellon in the form of an adjusted dividend payout rate as shown in the chart below. Note that the figure for 2009 is shown as 0% as the bank ended up with a net loss that year.

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Notes:
  1. BNY Mellon to Repurchase Up to $1.74 Billion of Common Stock; Federal Reserve Does Not Object to 2014 Capital Plan, Including Proposed Dividend Increase, BNY Mellon Press Releases, Mar 26 2014 []
  2. BNY Mellon Dividend History []