Bank Stocks for Dividend-Seekers
Bank dividend yields are set and look to stay that way.
Eric Compton: Bank stocks are often relied on for their dividends, and with CCAR 2019 in the rearview mirror, dividends for the banks under our coverage are more or less established through Q2 of 2020.
Today, Huntington, KeyCorp, and Wells Fargo have the highest dividend yields under our banking coverage, with Huntington north of 4%, and KeyCorp and Wells Fargo closer to 3.9%. For reference, many of the banks under our coverage have yields in the mid-2% to low 3% range, so a high 3% to 4% yield is meaningfully higher.
For Huntington, we view the bank as fairly valued, and the bank typically devotes a higher percentage of its earnings to dividends, closer to 40%-45%, hence the higher yield. In our opinion, we think this is about as high as the payout percentage will get, therefore we would expect dividend growth to roughly match earnings growth going forward.
For Wells and KeyCorp, the higher dividend yield is at least partially due to, in our view, the undervaluation in the stocks. Wells and KeyCorp have been two names we have viewed as undervalued for essentially all of 2019, but both stocks are closing this gap. With a fair value estimate for KeyCorp of $21, and a fair value estimate for Wells Fargo of $57, the dividend yields may fall just under half a percentage point for each, if they can close what we view to be a valuation gap. But shareholders, in this case, would be rewarded with share price appreciation, and dividend yields which would still be in the mid-3% range.
In general, with dividend payout ratios in the 30% to 40% range for most of the banks under our coverage, we view current dividends and payout structures as stable, meaning we view it as unlikely that the dividend payments would come under threat in the event of a downturn, with banks instead being able to adjust their share buybacks in response to earnings pressure.
Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.