Earlier this week, State Street (NYSE:STT) Chairman and CEO Jay Hooley expressed his desire to pursue a more aggressive capital-return policy for the global banking group – something he said will be included in the 2013 capital plan proposal due with the Federal Reserve next month.  This announcement comes within days of a similar position taken by Morgan Stanley (NYSE:MS) CEO James Gorman (see Morgan Stanley Shareholders Likely To Earn Rich Dividends Soon), and comes as a welcome relief to shareholders on two important fronts. Firstly, it indicates that the financial sector is finally coming out of the depressed dividend condition it has remained in since the global economic downturn of 2008. And secondly, it sends the signal that at least some banks, if not all, have a capital structure strong enough to actually consider returning cash back to the shareholders despite stricter regulations.
We maintain a price estimate of $51 for State Street’s stock, which is at a premium of about 10% to current market prices.
State Street’s dividend history shows a clear picture – the global custody bank tried to follow the simple policy of increasing its dividend payout per share by a cent every other quarter.  And it stuck to this policy quite ardently with the dividend per share rising gradually from 5 cents in the late 90s to 24 cents in late 2008 – ignoring the two 2-for-1 stock splits along the way which would have essentially doubled shareholder payout each time. And from time to time, State Street also resorted to buying back shares to return money to shareholders quicker.
But when things turned for the worse after the 2008 economic downturn, State Street was forced to slash dividends like all its peers to ensure sufficient capital to make up for considerable losses and asset devaluations witnessed across businesses. It cut dividends to a cent per share and practically stopped buying back shares. This is best demonstrated by the fact that over the 4-year period from 2008 to 2011, State Street repurchased shares worth $224 million in total, whereas for the single year 2007, it had repurchased $1 billion of its stock.
State Street’s adjusted dividend payout ratio, which factors in share repurchases along with common dividends for the bank, can be visualized from the chart above. We set the payout ration to zero for 2009 although State Street paid $168 million in dividend and repurchased shares worth $38 million because it reported a net loss of over $2 billion to common shareholders that year.
State Street is not very keen on going the acquisition route to boost investor returns – a stand made amply clear by Hooley’s statement: “We continue to remain cautious (about acquisitions).”  That leaves it with the alternatives of increasing dividend payouts, and reinstating more share repurchase plans. It must be mentioned here that earlier this year, State Street raised its dividends from 18 cents to 24 cents, and also announced a $1.8 billion stock repurchase plan through March 2013.  The bank will likely seek the Feds approval for another round of divide hike and for a fresh share repurchase program when it submits its capital plans for 2013 in January.
We forecast a significant increase in State Street’s adjusted dividend payout over the years to come – with the bank returning at least 60% of its earnings to shareholders in the form of dividends and share repurchases within five years. You can see how faster payout growth will affect State Street’s share value by making changes to the chart above.Notes:
- State Street may ask Fed for more aggressive capital-return plan, Reuters, Nov 4 2012 [↩]
- Dividend History, State Street Investor Relations [↩]
- State Street’s Hooley Says Returning Capital Is Priority, Bloomberg, Dec 4 2012 [↩]
- State Street Corporation Announces a $0.24 Quarterly Common Stock Dividend, a 33% Increase from the Prior Quarter’s Dividend and an Authorization to Purchase Up to $1.8 Billion of its Common Stock, State Street Press Releases, March 14 2012 [↩]