On Tuesday, Fifth Third Bancorp (FITB) increased its quarterly common stock dividend by 33% to 8 cents per share. The dividend will be paid on October 20 to shareholders of record as of September 30.
The strength of Fifth Third’s business model reflects the company’s commitment towards returning value to shareholders with its strong cash generation capabilities. Prior to this revision, the company had increased its quarterly dividend to 6 cents per share in March 2011, an increase of 500%.
After receiving the regulatory nod, Fifth Third decided to hike dividend in order to attract investors. Both the dividend increments came after the company’s repayment of $3.4 billion bailout money, which it had received during the financial crisis.
In January 2011, Fifth Third submitted a capital plan to the Federal Reserve Board, seeking approval for dividend hike and common stock repurchases. The Fed subsequently approved the dividend hike and stock buyback after the completion of stress tests to assess the banks’ financial position.
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 for the bailout money. Following the repayment of the bailout money, many banks started exerting pressure on the regulators to let them restore their dividends.
Among other banks, Cincinnati-based First Financial Bancorp (FFBC) will be the first bank to pay out 100% of its profits as dividends to shareholders due on October 3.
Earnings Recap
Fifth Third reported second quarter 2011 net income of $328 million or 35 cents per share, outpacing the Zacks Consensus Estimate of 27 cents. The results also compared favorably with net income of $88 million or 10 cents per share in the prior quarter and $130 million or 16 cents per share in the prior-year quarter.
Quarterly results at Fifth Third reflected a better-than-expected revenue figure backed by fee income growth. Credit metrics improved significantly, but operating expenses were low.
The company’s diverse revenue mix and credit quality improvement augur well going forward. But we would like to see a 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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