State Street’s 2015 Capital Plan Includes $1.8B In Buybacks, 13% Dividend Hike
Late last week, State Street (NYSE:STT) announced plans to buy back shares worth $1.8 billion between now and the end of June 2016 while also hiking common share dividends by 13%. [1] While slightly higher than the $1.7 billion share repurchase plan the bank put in place last year, the proposed buyback is lower than the record $2 billion worth of equity shares the global custody banking giant eliminated in 2013.
Compared to its peers, State Street’s capital return plan grew by a smaller percentage in 2014. An important reason behind this is most likely the slower pace of improvement in the banking giant’s capital ratios last year compared to other large banks. To put things in perspective, State Street aced the stress tests for 2014 with the highest core Tier 1 common capital ratio figures among the 30 banks tested, but it slipped to the 7th spot among the 31 banks tested in 2015.
We maintain our price estimate for State Street’s stock at $80, which is slightly ahead of the current market price.
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A quick glance through State Street’s dividend payment history shows that the bank raised its dividend at least once a year between 1995 and 2001, with the frequency doubling over the period from 2001 to 2008. [2] But as evidenced by the table below, State Street historically has not returned a lot of cash to investors. The bank handed out less than $400 million in dividends at its peak dividend rate in 2008. After maintaining quarterly dividends at a token 1-cent-a-share over 2009-2010, State Street gradually increased the figure to the current level of 30 cents a share. The numbers here have been taken from the bank’s annual reports:
| (in $ mil) | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
| Common Stock Dividends | 301 | 399 | 168 | 20 | 295 | 463 | 486 | 539 |
| Shares Repurchased | 1,002 | – | – | – | 675 | 1,440 | 2,040 | 1,650 |
| Total | 1,303 | 399 | 168 | 20 | 970 | 1,903 | 2,526 | 2,189 |
State Street’s focus on returning money to investors in recent years is demonstrated by the fact that the custody bank has repurchased more than $5 billion worth of shares over 2012-2014. As a direct result, the average number of its outstanding shares has fallen more than 10% from about 500 million in 2011 to under 425 million in 2014.
Assuming State Street’s board approves the dividend hike starting in Q2 2015, the bank will pay shareholders $0.34 per share for three quarters this year – implying dividends of $1.32 per share for the year 2015. This points to a little less than $550 million in common stock dividends for the year, if the number of shares stays constant at 420 million (though it will likely decline). That combined with the proposed $1.8 billion share buyback plan means that the bank will return $2.35 billion cash to its investors this year. Notably, this is just 7% lower than the $2.5 billion figure for 2013 – making it the second highest payout by State Street in its history.
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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