BNY Mellon Details Plans To Return Up To $3.5 Billion To Shareholders Through Q2 2017

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Bank of New York Mellon

Late last week, The Bank of New York Mellon Corporation (NYSE:BK) announced that it has secured the Federal Reserve’s approval for plans to return as much as $3.5 billion to its shareholders over the one-year period from Q3 2016 to Q2 2017. [1] The capital return plan was revealed by the global custody banking giant immediately after the the Fed detailed results for the latest iteration of its annual Comprehensive Capital Analysis and Review (CCAR) for banks (see Lots Of Winners In The Fed’s 2016 Stress Test, But Deutsche Bank, Santander Stumble Again). With a business model focused on custody banking and asset management, BNY Mellon had little difficulty clearing the stress tests, which primarily test the robustness of traditional loans-and-deposits banks as well as investment banks.

The proposed capital return plan entails a 12% hike in quarterly dividends from $0.17 per share to $0.19 per share, and a share buyback program to repurchase $2.14 billion worth of the bank’s shares over the next four quarters. The bank can also repurchase an additional $560 million in shares provided it successfully raises $750 million through a preferred stock issuance – taking the total potential buyback figure to $2.7 billion.

We maintain a $45 price estimate for BNY Mellon’s stock. Our price target is about 20% higher than the current market price due to the sharp sell-off in bank shares over recent months in anticipation of the U.K. leaving the European Union, as key economic indicators point to weak growth figures in the near future.

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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 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, and maintained it at that level until Q2 2016. The figure is expected to increase to $0.19 from Q3 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:

BK_CapitalReturn_2016

As BNY Mellon paid $0.17 in dividends per share over the first two quarter of 2016, and proposes to pay $0.19 per share over the remaining two quarters, total dividends for the year should be $0.72 per share. This works out to total dividends of around $775 million for the year, assuming the total number of share outstanding remains constant at the current level of 1.08 billion. As for the share buyback program, assuming BNY Mellon successfully issues the required preferred stock over coming months, total buybacks should be $2.7 billion over the next four quarters. The bank repurchased $577 million in shares over Q1 2016 and was authorized to repurchase an additional $516 million for Q2 2o16 – taking the total repurchase figure over the first half of the year to just under $1.1 billion. Taken together with $1.35 billion in proposed purchases for the rest of the year, this points to total share repurchases of $2.4 billion in 2016.

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. You can understand how a change in the bank’s adjusted dividend payout affects its share value by making changes to the chart.

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Notes:
  1. BNY Mellon to Repurchase up to $2.7 Billion of Common Stock; Federal Reserve Does Not Object to 2016 Capital Plan, Including Proposed Dividend Increase, BNY Mellon Press Releases, Jun 29 2016 []
  2. BNY Mellon Dividend History []