State Street Hikes Dividends, Maintains Buybacks To Announce $2-Billion Capital Return Plan Again This Year

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State Street’s (NYSE:STT) capital return plan for 2017 is largely identical to what the custody banking giant detailed last year, with a 10% hike in dividends and a new share repurchase plan worth $1.4 billion expected to result in a total payout of $2 billion this year too. The similar total payout figure is because the bank’s total number of outstanding shares has fallen roughly 10% compared to the figure a year ago – so total dividends distributed this year should remain unaffected when factoring in the 10% dividend hike. The newly announced capital plan entails an increase in quarterly dividends from 38 cents a share to 42 cents a share beginning Q3 2017. This represents total dividends of just over $600 million considering roughly 370 million outstanding shares on average.

Unlike other banking giants who reported sizable increases in their payouts at the end of the Fed’s current stress test cycle, State Street’s payouts peaked at $2.4 billion in 2015. The bank’s 2017 plan reinforces our belief that its total payout rate (dividends and share repurchases combined) will gradually settle around 80% going forward – down from almost 120% in 2013. That is why we stick to our $86 price estimate for State Street’s stock, which is slightly below its current market price.

See our full analysis for State Street here

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State Street raised its dividend at least once a year between 1995 and 2001, with the frequency doubling from 2001 to 2008. But as shown in 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 34 cents per share.

The table below summarizes State Street’s capital return figures for each year since 2007, and has been compiled using figures reported in its annual SEC filings:

STT_QA_CapitalReturn2017

State Street’s focus on returning money to investors in recent years is demonstrated by the fact that the custody bank has repurchased almost $8.7 billion worth of shares over 2011-2016. As a direct result, the average number of its outstanding shares has fallen 25% from almost 500 million in 2011 to around 375 million now.

As State Street paid 38 cents in dividends per share over the first two quarters of 2017, and proposes to pay 42 cents per share over the remaining two quarters, total dividends for the year should be $1.60 per share. This works out to total dividends of $600 million for the year, assuming the total number of shares outstanding remains constant at the current level of 375 million (although the figure will continue to fall due to share repurchases). Also, the bank repurchased had authorization in place to repurchase $750 million worth of shares at the end of 2016, which we expect would have been used up over the first half of 2017. Taken together with $700 million in proposed purchases for the rest of the year (half of the total proposed repurchases of $1.4 billion), this points to total share repurchases of $1.45 billion in 2017.

We represent dividend payouts and share repurchases in our analysis of State Street in the form of an adjusted dividend payout rate, as shown in the chart below. You can understand how an increase in State Street’s adjusted payout ratio affects its share value by making changes here.

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