Morgan Stanley’s Plan To Return $4.25 Billion To Shareholders Gets Fed Clearance

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Morgan Stanley (NYSE:MS) emerged as the biggest gainer among all banks that were a part of the Federal Reserve’s stress test for banks late last week after the investment bank announced plans to hike its dividends by 50% and to repurchase shares worth $3.1 billion. ((Morgan Stanley Announces Share Repurchase of Up to $3.1 Billion of Common Stock and the Increase of Its Quarterly Dividend to $0.15 Per Share, Morgan Stanley Press Releases, Mar 11 2015)) Earlier this month, investors had reacted negatively to news that Morgan Stanley was one of three banking giants that had been asked to resubmit their capital plans following the preliminary round of the Fed’s annual test (see Fed Stress Test For Banks: Rationale, Results & Implications). But their concerns evaporated when the Fed cleared the bank’s better-than-expected capital plan for 2015 late last Wednesday (March 11), sending Morgan Stanley’s shares soaring 6.1% the next day. One of the factors that helped in the rally was the news that the bank did not reduce its investor payout as a past of the revised plan, as it simply dropped plans to repurchase $4.9 billion worth of trust preferred securities (TruPS). [1]

Given the bank’s roughly 1.95 billion outstanding shares, the proposed 15-cents-a-share quarterly dividend represents a total dividend payout of around $1.15 billion. Coupled with the share buyback plan, the approved plan represents Morgan Stanley’s intention to return $4.25 billion to shareholders over the next four quarters. Notably, this is only slightly lower than the $4.75 billion in cash the bank handed out on an average over the 2005-2007 period

See our full analysis for Morgan Stanley here

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We maintain a $38 price estimate for Morgan Stanley’s stock, which is slightly ahead of the current market price.

Historically, Morgan Stanley focused considerably on returning cash to investors – something that was a common trend among investment banks prior to the economic downturn. Like its peers, Morgan Stanley preferred to do so not by paying out a high dividend each quarter, but by buying back shares worth billions of dollars each year. This is evident from the fact that the bank’s increase in quarterly dividends between Q1 2000 to Q1 2009 was not sizable, but by the end of this period the bank was routinely spending three times the amount it handed out as dividends to repurchase shares.

The table below puts things in perspective, as it summarizes Morgan Stanley’s capital return figures for each year since 2005. The data has been compiled using figures reported in annual reports:

(in $ mil) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Common Stock Dividends 1,180 1,148 1,151 822 623 275 542 373 379 808
Shares Repurchased 3,693 3,376 3,753 1,831 50 317 317 227 691 1,458
Total 4,873 4,524 4,904 2,653 673 592 859 600 1,070 2,266

The disparity in Morgan Stanley’s payout to common shareholders before and after the economic downturn stand out clearly here. But a poor operating performance over the period was not the only factor to blame for this. The bigger reason was that Morgan Stanley was saving up to acquire 100% of the Smith Barney brokerage business from Citigroup. In fact, once the bank completed the acquisition in early 2013, its plan to buy back $500 million worth of shares was approved by the Federal Reserve within a couple of months. But the real boost came last year when Morgan Stanley doubled dividends to 10 cents a share and also put in place a program to repurchase shares worth $1 billion for a total payout of $1.8 billion. The bank has pushed the envelope considerably this time around, as the proposed payout is almost 150% higher than that for the previous year. But the hike was hardly unexpected, given the fact that Morgan Stanley is the country’s best capitalized banking group (see A Look At Common Equity Tier 1 Capital Ratios For The Largest U.S. Banks).

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Notes:
  1. Fed Approves Morgan Stanley’s Revised Capital Plan, Reuters, Mar 11 2015 []