Bank of America to raise its dividend by 60% after bank stress tests

The Marriner S. Eccles Federal Reserve Board Building in Washington is shown in June 2015 file photo.
The Marriner S. Eccles Federal Reserve Board Building in Washington is shown in June 2015 file photo. AP

Bank of America announced Wednesday a 60 percent boost in its quarterly common stock dividend, the latest sign of improving health at the Charlotte-based bank.

The announcement was among a flurry of similar disclosures by other large banks that won clearance Wednesday from the Federal Reserve to return more capital to investors following the regulator’s latest “stress tests.”

Bank of America said it will increase the dividend to 12 cents per share from 7.5 cents, starting in the third quarter, as well as buy back $12.9 billion in common stock from July 1 through June 2018.

Wells Fargo, which drew extra attention in this year’s tests after it became embroiled in a major sales scandal last fall, also cleared the exam. The San Francisco-based bank said it will increase its dividend to 39 cents from 38 cents and repurchase up to $11.5 billion of common stock.

The results were part of closely-watched annual reviews regulators have conducted since the financial crisis to determine if 34 major bank holding companies would have enough capital to ride out a severe global recession in which the U.S. unemployment rate rises to 10 percent.

Last week, the Fed released results that showed the banks would have a sufficient cushion in such a downturn. On Wednesday, the regulator took into account the banks’ plans to increase dividends and buy back more stock in their review – and whether capital levels would still meet required minimums.

In a conference call with reporters, senior Fed officials said the latest results demonstrate the strength of the financial sector and show that banks are well-capitalized. But, officials added, the fact that no firms failed this year does not mean they are all fully meeting the Fed’s expectations.

This year, Capital One Financial was the only firm to be dinged by the Fed, which cited weaknesses in the capital planning process of the McLean, Va.-based firm. The Fed said it did not object to Capital One’s capital plan but is requiring it to submit a new proposal by Dec. 28 that addresses the problems.

Wednesday marked the first time since the Fed’s testing of capital plans started in 2011 that all banks passed.

Bank of America, which has stumbled on past stress tests, remained above regulatory capital minimums, as did Winston-Salem-based BB&T. The two firms, plus Wells Fargo, represent the largest banks in the Charlotte market by deposits.

Bank of America CEO Brian Moynihan has remained under pressure from long-time investors frustrated the bank’s quarterly common stock dividend has not risen faster. The payout used to be 64 cents per share before the bank slashed it to 1 cent amid the financial crisis.

Last year, Bank of America won Fed approval to raise the dividend to 7.5 cents per share from 5 cents, the first time the bank received an OK to increase the dividend since 2014.

In his annual letter to shareholders this year, Moynihan signaled his desire to increase the dividend. But he also took pains to explain why the payout isn’t headed to 64 cents anytime soon.

To raise capital over the years, the bank has issued billions of new shares, meaning the payout is now spread across many more shares. That’s why Bank of America is eager to buy back stock, so it can reduce its share count.

The latest increase in Bank of America’s dividend could mean Warren Buffett’s Berkshire Hathaway becomes the biggest common shareholder in the bank.

In 2011, Buffett made a $5 billion investment in Bank of America that allows Berkshire Hathaway to acquire 700 million shares of the bank’s common stock before Sept. 2021. In his company’s annual report this year, Buffett said it would make financial sense to make that move if Bank of America’s annual dividend rose above 44 cents per share.

BB&T said Wednesday the Fed has given it approval to raise its quarterly dividend to 33 cents from 30 cents, and make up to $1.88 billion in share buybacks beginning in the third quarter of 2017.

Senior Fed officials said that, even after a severe recession, the 34 banks would be able to make substantial capital distributions and still meet minimum capital levels.

Deon Roberts: 704-358-5248, @DeonERoberts