Bank Dividends Fail to Rally Stocks

Last Friday, bank investors were supposed to have gotten the news they had been anticipating for the past two years. After submitting capital plans to the Federal Reserve, the Fed gave several banks the green light to begin returning capital to shareholders. The resumption of dividends and share buybacks were supposed to launch bank shares higher, as investors chased higher yields and banks reduced their share counts. So why have bank shares failed to take flight?

First, a look at what the new plans look like at the nation's largest banks. JPMorgan (JPM) is upping the dividend to $1 a year, from $0.20, as well as a $15 billion stock buyback program. Wells Fargo (WFC) announced a special dividend of $0.07 a share, in addition to the $0.05 quarterly dividend. It also approved a buyback of 200 million shares.

Goldman Sachs (GS) is allowed to buy back the stake it sold to Warren Buffett for $5.5 billion, plus another $1.64 billion in dividend payments. Goldman may increase the dividend on common shares, or institute a share buyback later in the year. Citigroup (C) is paying a penny dividend, after it completes a 1 for 10 reverse split. Morgan Stanley (MS) has said it will pursue purchasing the rest of Smith Barney from Citigroup before beginning large dividend increases.

Bank of America (BAC) was the loser of the group, having its dividend plan rejected, although it will be re-submitting a capital plan to the Fed. This was particularly surprising, given the recent comments from the bank promising high levels of capital returns to shareholders.

Given the strong news from JPMorgan, Wells, and GS, one would have expected shares to have moved up significantly on the news. However, since Friday shares of JPM are up about 1%, shares of WFC are down 1%, and shares of GS lead the group with a gain of about 2%. Morgan Stanley shares are flat, Citi is down 1.5%, and BAC is the big loser, down 5%. The S&P 500 is up 1.5% over the same five-day period, meaning only Goldman is outperforming the broader market.

So what is causing the big banks to underperform? Renewed fears of another leg down in housing prices have begun making headlines in recent days, adding to uncertainty over the strength on that sector of the economy going forward. Higher energy prices are also a concern, with the prices for oil and gasoline continuing to grind higher. The argument could be made that BAC is dragging down the whole sector, as investors question how strong the industry can be when such a large player still seems hamstrung. Another argument could be that shares had already priced the news into the stocks, and this is a "buy the rumors, sell the news"-type event.

Whatever the cause of the sluggish share prices, JPMorgan looks attractive here. Although the company increased the dividend by $0.80 a share per year, shares are only up about $0.30 on the news. The higher dividend and share buyback plan should help provide a floor to the share price, and the bank's industry-leading position will allow it to grow earnings at a faster rate than its peers. The new dividend is payable April 30 to shareholders of record April 6, so shares should move higher into the record date.

Disclosure: I am long BAC, MS, C.