Banking Sector’s Stress Test Results Could Mean More Dividends For Investors (BAC, C, WFC, more)

Ahead of the banking sector’s stress test results to be released later today, many analysts are bullish on some big names in the industry, especially Bank of America (BAC).

The bank stress tests are conducted by regulators at the Federal Reserve to determine whether or not financial institutions have enough capital on their balance sheets to withstand events in adverse economic conditions. The results will be released to the banks today. However, the banks are not allowed to reveal whether they passed or not for another week.

For the most part, analyst predict that the major banks will pass the stress test and get approval to finally pay out more money to shareholders. This means that the institutions will finally be allowed dish out more capital to shareholders in the form of increasing dividends and authorizing share repurchase plans.

This is big news for banks like Citigroup (C), which failed the stress test last year, and Bank of America, both of which have pathetically low dividend yields at 0.09% and 0.33%, respectively.

The biggest winner of the stress test aftermath could be Bank of America, according to analysts Dick Bove and Meredith Whitney. Bove is projecting that BAC shares will reach $30, which would be about a 150% upside to Wednesday’s closing price of $11.92. Bove notes that it may take two or three years to get to that point, but it is a possibility considering that the stock trades substantially below its book value due to regulatory measures and a hangover from the recession.

Meredith Whitney is a more cautious in her BAC expectation, but still sees a greater upside than other analysts covered by Thomson Reuters. Whitey sees BAC shares reaching $15, which suggests a 26% upside to Wednesday’s closing price. The average price target on Bank of America by analysts is $12.40.

For dividend investors, the fallout from the stress test results could be a boon. If the Federal Reserve finally allows banks to increase dividend payouts, financial institutions like Wells Fargo (WFC), JP Morgan (JPM), and US Bank (USB) could all be even more attractive plays as yields increase, in addition to Citigroup and Bank of America.

Despite the optimistic view from many analysts, it does not mean that the news of the stress test is all golden. Some analysts point out that the results of the stress test are just accounting tricks; the real focus should be on sales growth and margin expansion, which have been on the decline. While potential increases in dividend payouts and share buybacks are a positive for investors, it will not mean much if the financial sector’s fundamentals decline.

The Bottom Line
Shares of Bank of America (BAC) have a dividend yield of 0.33% based on Thursday’s intraday trading price of $12.17 and the company’s annualized dividend payout of 4 cents per share.

Bank of America (BAC) is not recommended at this time, holding a Dividend.com DARS™ Rating of 3.1 out of 5 stars.

Be sure to visit our complete recommended list of the Best Dividend Stocks, as well as a detailed explanation of our ratings system here.

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