Fifth Third Bancorp’s (FITB) board of directors increased the cash dividend to 6 cents per share on its common stock. First quarter 2011 cash dividend of 6 cents represents an increase of 5 cents from Fifth Third’s previous quarterly dividend of 1 cent, an increase of 500%. The increased dividend will be payable on April 21,to shareholders of record as of April 1.
The strength of Fifth Third’s business model reflects the company’s commitment to return value to shareholders with its strong cash generation capabilities. Prior to this revision, the company reduced its quarterly dividend twice in 2008. Firstly, the dividend was slashed by 65.9% (from 44 cents to 15 cents per share), and was later inched down to a penny.
In January 2011, Fifth Third submitted a capital plan to the Federal Reserve Board, including dividend hike and common stock repurchases. The action followed Fed’s approval of dividend hike and stock buyback after the completion of stress tests to assess the banks’ financial position, which would definitely boost investors’ confidence in the U.S. Banks.
Fifth Third was one of the 19 banks that were subjected to “stress tests” conducted by the Federal Reserve. Due to the recession, Fed had put restrictions on increasing banks’ dividends and share buybacks in exchange of the bailout money. Following the repayment of the bailout money, many banks started exerting pressure on the regulators to let them restore their dividends.
This long expected decision was a major milestone for the banking sector, signalling that the notified banks have fully emerged from the effects of the financial crisis. This paved the way for these banks to reinstate dividends and buy back shares.
These banks, including big names such as JPMorgan Chase & Co. (JPM), U.S. Bancorp (USB), Bank of America Corporation (BAC), Wells Fargo & Company (WFC) and Citigroup Inc. (C), are required to show that they had adequate capital to address potential losses over the next two years under various scenarios.
Last week, Fifth Third was finally able to exit from the Treasury’s Troubled Asset Relief Program (TARP) with the purchase of warrants that were held by the Treasury. The company repurchased the warrants for approximately $280.0 million. The warrants were issued to the Treasury as part of their efforts to bail the company out through TARP.
In January, Fifth Third reported better-than-expected fourth quarter 2010 earnings that came in at 33 cents per share, substantially ahead of the Zacks Consensus Estimate of 25 cents. The results were primarily driven by better-than-expected improvement in credit metrics. The company reported a drop in delinquencies and provisions for loan losses. Revenue numbers were also satisfactory.
Fifth Third went for a public offering of $1.7 billion of its common stock, following an announcement to pay back the TARP loan in January 2011. While the repayment of TARP dues is positive having removed the government overhang, the dilutive impact of the stock offering to enable the repayment cannot be ignored. Additionally, there remain concerns over regulatory issues.
Yet its diverse revenue mix and credit quality improvement augur well. But we would like to see substantial top-line improvement before becoming extremely bullish on the stock. Given the current economic environment in its business footprint, such expansion remains elusive in the near term.
Fifth Third currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Further, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.
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