At a conference last week, Morgan Stanley (NYSE:MS) CEO James Gorman indicated that the global investment bank would like to return excess cash to its investors rather than use it to expand its business.  Gorman believes that it is time that the “long suffering shareholders” finally receive their dues and that the “capital flush” bank is in a good position to do so over the months to come. Morgan Stanley has been paying shareholders a bare minimum dividend of 5 cents per share since early 2009, and has also not made a major share repurchase since then. Such a boost to payout will require the bank to get its plans approved by the Fed as part of the stress tests. It must be noted here that Morgan Stanley chose to retain its dividend policy this year to ensure sufficient capital for its Smith Barney acquisition from Citigroup (NYSE:C).
We have a $19 price estimate for Morgan Stanley’s stock, which is about 10% ahead of current market prices.
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Morgan Stanley has been focusing on shoring up its balance sheet in recent years to comply with strict U.S. regulations. This included more than doubling the capital levels from $30 billion at the end of 2008 to more than $66 billion – aimed at reducing the amount of leverage to a third – and also increasing the firm’s liquidity. Reduced investor payouts were the direct result of these changes with the bank capping dividend payments and curbing share repurchase activities.
A better understanding of the situation is obtained by glancing through Morgan Stanley’s annual reports for the last few years. The bank paid dividends in excess of $1.1 billion each year from 2005 to 2007, and also repurchased shares worth well over $11 billion over the three-year period. But things have changed drastically since 2008, with the bank paying $275 million and $542 million in dividends for 2010 and 2011, respectively. In comparison, the number of outstanding shares has nearly doubled from just over a billion in 2007 to almost two billion now.
Morgan Stanley’s adjusted dividend payout ratio, which factors in share repurchases along with common dividends for the bank, can be visualized from the chart above. Please note that for the years in which Morgan Stanley reported a net loss to common shareholders (2008 and 2009), we set the payout ratio to zero. The same applies to the current year as we forecast the bank to report a net loss of 200 million attributable to common shareholders for 2012.
The bank’s push to return more cash to investors is understandable considering the reducing investment opportunities due to the difficult economic circumstances. We forecast a significant increase in Morgan Stanley’s adjusted dividend payout over the years to come – with the bank returning 75% of its earnings to shareholders in the form of dividends and share repurchases within five years.
Feel free to tweak the chart above to see how a change to the payout affects Morgan Stanley’s estimated value.Notes: