The Fed’s Stress Test & State Street: Approved For $2.1B Share Buyback Plan

by Trefis Team
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Last week, the Federal Reserve approved State Street‘s (NYSE:STT) plans to initiate the biggest share buyback in its history. [1] The approval in itself comes as no surprise as the banking group’s performance in the Fed’s stress tests for 2013 was second only to that of The Bank of New York Mellon Corporation (NYSE:BK). State Street actually boasted of the best total risk-weighed capital ratio among the 18 banks that underwent rigorous scenarios posed by the tests (see The Fed’s Stress Test: Summary, Results And Implications).

The stock repurchase plan gives State Street investors, who weren’t really enthusiastic after the bank’s decision last month to increase its quarterly dividend by a marginal 2 cents (from 24¢ to 26¢), a real reason to celebrate. [2]

We maintain our price estimate for State Street’s stock at $61, which is slightly above the current market price.

A quick glance through State Street’s dividend payment history shows that the bank most definitely strives to grow its dividend payout steadily. [3] After all, the bank has raised its dividend at least once a year since 1995 with the frequency doubling over the period 2001-2008. But as is evident from the table below, State Street hasn’t really been a big fan of returning too much cash to investors. The bank handed out less than $400 million in dividends at the peak dividend rate prevalent in 2008. The numbers here have been taken from the bank’s annual reports:

(in $ mil) 2007 2008 2009 2010 2011 2012
Common Stock Dividends 301 399 168 20 295 463
Shares Repurchased 1,002 79 38 44 63 101
Total 1,303 478 206 64 358 564

The proposed $2.1 billion share repurchase plan, however, beats this trend. Combined with the $0.26 in dividend the bank will pay out per share for each quarter this year, State Street will return just under $2.6 billion in cash to investors – nearly double the highest-ever figure of $1.3 billion in 2007.

We represent these payouts in our analysis of State Street in the form of an adjusted dividend payout rate shown in the chart below. As this payout rate was not meaningful in 2009, we represent it in the chart as 0%.

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Notes:
  1. State Street Corporation Announces an Authorization to Purchase Up to $2.1 Billion of its Common Stock, State Street Press Releases, Mar 14 2013 []
  2. State Street Corporation Announces Quarterly Common Stock Dividend, State Street Press Releases, Feb 21 2013 []
  3. Dividend History []
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