Fifth Third Bancorp
) can now breathe a sigh of relief as the company announced
yesterday that the Federal Reserve did not object to its proposed
capital plan through March 2013, which included possible increase
in its dividend in the third quarter as well as share buybacks.
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Fifth Third, which currently pays a dividend of 8 cents per share,
has proposed a raise in its dividend to 10 cents. Following the
Fed's nod, the company would consider the probability of a dividend
raise in its scheduled regular meeting in September.
In addition to a positive development on the dividend front, Fifth
Third's Board of Directors approved a new share buyback
authorization of 100 million shares. This replaced the previous
authorization from 2007 that had 14 million shares remaining.
As a matter of fact, Fifth Third's capital plan includes potential
share repurchases of up to $600 million through the first quarter
of 2013, plus any incremental buybacks related to any after-tax
gains from the
) sale. Fifth Third intends to soon begin with the share buybacks
through a contract with a counterparty, which would buyback $350
million worth of common shares on its behalf.
Notably, Fifth Third could not clear the stress test earlier this
year and in June the company resubmitted its proposed capital
actions through March 31, 2013. This time it managed to get a
no-objection. However, for any capital moves beyond that date,
Fifth Third will again have to submit a subsequent plan.
In March, the Fed's objection to a number of elements in Fifth
Third's capital plan, including increases in its quarterly common
dividend and the initiation of common share repurchases, had put
the company in the back foot and weakened its competitive position
to some extent. Therefore, a positive development on that
front is encouraging. In fact, this will inspire investors'
confidence in the stock.
As a matter of fact, though a number of Wall Street biggies such as
Wells Fargo & Co.
), passed the stress test with their proposed capital plans
including dividend increases and share buybacks, companies such as
Fifth Third and
) faced a setback as the Fed objected to their capital plans.
While Fifth Third included possible dividend increase and share
buyback plans in the resubmitted version, Citi decided against any
hike in its shareholders payout in 2012. Instead of boosting its
capital payouts, Citi intends to build its capital level and
continue with efforts to trim its non-core assets.
Going forward, we believe that with a diversified traditional
banking platform, Fifth Third remains well poised to benefit from a
recovering economy. Its traditional commercial banking franchise,
diverse revenue mix, improved credit quality and enhanced capital
position serves as a positive catalyst for the stock. Capital
deployment efforts are encouraging. Yet, a low interest rate
environment, regulatory issues as well as competitive pressures are
Fifth Third currently retains its Zacks #2 Rank, which translates
into a short-term Buy rating. However, considering its
fundamentals, we have a long term Neutral recommendation on the