Goldman Hikes Dividends, Remains Tight-Lipped About Share Buybacks

With the country’s largest banking giants detailing their capital plans for 2015 on Wednesday, March 11, Goldman Sachs (NYSE:GS) stood out as the only one among them to not divulge the details of its share repurchase plan. ^[1] While Goldman mentions the expected increase in quarterly dividends at the culmination of the Fed’s stress tests for banks each year, it has maintained a policy of not revealing the total size of its capital return plan over the years.

The premier investment bank cut it close with the financial regulator for the second consecutive year, as it had to resubmit its capital plan before getting the Fed’s approval for the payout this year too. ^[2] Under the approved plan, Goldman is hiking its quarterly dividends by 8.3% – from 60 cents a share to 65 cents apiece. While Goldman repurchased shares worth $5.5 billion over 2014, we believe that the figure for this year will be considerably lower – possibly in the $4-5 billion range. This would mean that the bank is most likely looking to return between $5 billion and $6 billion in cash to investors over the next four quarters. Investors remained optimistic about the buybacks, though, as is evident from the fact that Goldman’s shares jumped more than 3% over trading the day following the announcement.

See our full analysis for Goldman Sachs here

We maintain our $189 price estimate for Goldman’s stock, which is around the current market price

Goldman’s quarterly dividend increased from 25 cents a share in 2005 to 35 cents in early 2006, and remained at that level for each quarter over the next six years except for the one-time 46.67-cent payout in Q4 2008. Goldman began increasing dividends in early 2012, and hiked it each year to reach the current level of 60 cents a share last year. The bank now intends to increase dividends to 65 cents a share starting the next quarter, pending an approval from its board.

The table below summarizes Goldman’s capital return figures for each year since 2005, and has been compiled using figures reported in annual reports:

As can be seen clearly from this table, Goldman prefers to return cash to investors through share repurchases rather than by paying out dividends. Over 2005-2007, the investment bank repurchased an average of $8 billion worth of its shares each year – representing almost 95% of the total cash it returned to investors for the period. The payout fell drastically over 2008-2009 as a result of the economic downturn, before reaching $5 billion in 2010. Goldman’s total payouts have averaged $6.5 billion over the last four years. But the figure has also fluctuated considerably over the period. Notably, the share repurchases decreased over 2014 compared to 2013.

We believe that Goldman will be setting aside less cash to distribute to investors this year too, primarily because of two reasons: firstly, the bank passed the quantitative round of the Fed’s stress test by a very narrow margin – greatly restricting its ability to increase its payout (see Fed Stress Test For Banks: Rationale, Results & Implications). Also, as the Fed asked Goldman to resubmit its capital plan last week, the bank would have been forced to reduce its capital plan to be able to clear the stress tests. At best, one can expect Goldman’s approved capital plan to be identical to the one for the previous year.

We represent dividend payouts in our analysis of Goldman Sachs in the form of an adjusted dividend payout rate, as shown in the chart below. As this payout rate was not meaningful in 2008 and 2011, we represent it in the chart as 0% for these years.

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1. Goldman Sachs Announcement, March 11 2015 [↩]
2. Federal Reserve releases results of Comprehensive Capital Analysis and Review (CCAR), Federal Reserve Website, Mar 11 2015 [↩]