A Tale of Two Very Different Banks ... and Both Are Set to Boost My Portfolio
Let's see why this meat-and-potatoes financial services name could pay dividends soon, especially after the Fed's stress test results.
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The Fed's banking stress tests came and went on Friday evening with very little fanfare -- but added some especially good news for two banks I'm in.
This year's tests for the largest banks were considered less severe than it has been in the past, but still simulated a 10% unemployment rate, and a 33% drop in home prices. The 22 big banks subject to this recessionary scenario would, according to the results, have enough capital on hand to absorb more than $550 billion in losses and still retain the ability to extend capital on credit to businesses and consumers.
A prepared statement released by Fed Gov Michelle Bowman, who is the Fed's new Vice Chair for banking supervision, reads as follows:
"Large banks remain well capitalized and resilient to a range of severe outcomes." The $550B in simulated losses were smaller in percentage terms relative to 2024 industry profitability than were the simulated losses created during the 2024 stress tests when measured against 2023 profitability. This was largely due to improved net interest margins and increased income driven by fees over that most recently completed calendar year, especially through the later part of said year.
Why This Matters to Us
Why these results matter in a year where no banks were expected to fail the simulation outright is simple: Dividend investors and investors that balance their portfolios through allocations toward dividend stocks often see these banks boost returns to shareholders after these results are released.
Investors, sell-side analysts, and to a lesser degree traders are closely monitoring not just banking health, which this year was close to assumed, but how these banks choose to increase (if they do) and how they go about implementing those returns.
An expected reduction in regulatory demands made on the banks may also matter here. It's no secret that the Trump administration has been trying to rein in regulation across many industries to include banking. It's also well known that Bowman, a first-term Trump appointee to the Fed's Board of Governors, tends to express views that are in line with those preferences also expressed by the large banks themselves.
Trading / Investing
I came into these stress tests long the equity of both JPMorgan Chase JPM and Wells Fargo WFC. Both names, along with many of their competitors, rallied into the event. I haven't been long JPM all that long, and am currently up 21% on the position. I entered the name simply because of its broad appeal as a "best in class" name. I have been long WFC much longer in anticipation of the Fed eventually lifting its asset cap penalty after scandals of management teams of the past. That clearance finally came last month. I stand up 42% on that name. Is there more room to run?
I think that there probably is. I think that as regulatory mayhem lifts, and as taxes drop or at least don't rise (fingers crossed), that banking could be a decent place to make a boring buck (isn't that the best kind?). I use these stocks as a not-so-volatile anchor on my most active portfolio. One bank that does it all and does it all well, led by a CEO (Jamie Dimon) who's name is universally well known and respected. The other bank is a meat-and-potatoes traditional banker that would probably like to expand in areas such as investment banking and no can try to do so, led by a far less famous, but sharp and execution-focused CEO (Charlie Scharf). These banks remain my two choices in the space for now.
Dividend Announcements
We should start hearing news from the largest U.S. banks on changes to be made to their cash dividend payment schedule and their share buyback plans as soon as tomorrow (Tuesday) afternoon. I am especially hopeful for the upcoming announcement that will be made by Wells Fargo.
At an industry event roughly three weeks ago, Wells Fargo CFO Mike Santomassimo said, "As we look forward from a capital perspective, it's great that we have a lot of excess capital. We have more flexibility to deploy it now that we don't have an asset cap, which is great, and so that will help drive the growth. We've been active in giving some back to shareholders as well, so we'll look at that."
Coming into the new week, Wells Fargo trades at less than 14-times forward looking earnings and pays shareholders $1.60 (annually) in cash dividends, yielding 2.01%. JPMorgan trades at a beefier (But probably still undervalued) 15.5-times forward looking earnings and pays shareholders $5.60 (annually) in cash dividends, yielding 1.95%.
Of all of these largest banks, according to a survey of analysts compiled by FactSet, Wells Fargo is projected to increase its dividend by a consensus 11.3% when these announcements come down. That's the largest projected increase, in percentage terms, according to that survey, of any large bank and would take the yield up to 2.24% based on Friday's closing price. Who's number two? Not JPM. Goldman Sachs GS, according to that survey, is projected to increase their dividend by 8.5%.
At the time of publication, Guilfoyle was long WFC, JPM equity.
