State Street Corp. (STT) has raised its quarterly cash dividend to 18 cents per share. This dividend is payable on April 15, 2011 to shareholders of record at the close of business on April 1, 2011.
Hence, the annual dividend payable to the shareholders amounts to 72 cents per share, a substantial rise from the prior annual dividend of 4 cents per share.
It was in the third quarter of 2008 that State Street had last increased its quarterly dividend by 1 cent to 24 cents per share, which continued till the fourth quarter of 2008. Thereafter, as a result of the financial crisis, the company had taken TARP money from the government to stabilize its financials and had to reduce its quarterly dividend to 1 cent per share.
Thus, the hike in State Street’s annual dividend is a sort of recovery, as the company had paid 96 cents per share prior to the recession.
In mid-2009, State Street repaid the TARP money. Since then the company has been waiting for the Federal Reserve nod to raise dividend. Also, a significant turnaround in the company’s financial conditions from what it had been during the financial crisis strengthened its case for the dividend hike.
In January, State Street, along with 18 other banks including Bank of America Corp. (BAC), Wells Fargo & Company (WFC), JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), had submitted their capital plans to the Federal Reserve for the second round of stress tests to secure approval for dividend increases and share buybacks.
On Friday, the stress test results were announced. The Fed allowed State Street to increase dividend and also repurchase shares. The company also announced that it would buy back $675 million stock in 2011, marking its first share repurchase program since January 2008. This buyback program would replace the previous $1 billion program that has nearly $13.25 million still unutilized.
State Street’s decision to restore dividend and authorize a new share repurchase program will surely boost the investors’ confidence in the stockThough we are concerned about the company’s risky investment portfolio exposure, we believe that the recent realignment of its investment portfolio, various restructuring programs, strong regulatory capital ratios, along with well-off core servicing and investment management franchises, will help it offset the financial frailty caused by the sluggish economic recovery, thereby providing buoyancy to growth in the near to mid term.
Currently, State Street retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
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