State Street Rewards Investors With $2.2 Billion Capital Plan

State Street recently announced plans to buy back shares worth $1.7 billion between now and the end of March 2015, while also hiking common share dividends by 15%. Last year, the bank initiated the biggest share buyback in its history after getting the Federal Reserve’s approval on its plans to eliminate $2.1 billion worth of its shares from the equity market. The Fed did not have any problems clearing State Street’s capital plans this time either, given that the bank aced this year’s stress tests with the highest core Tier 1 common capital ratio figures among the 30 banks tested (see Fed Stress Test For Banks: Rationale, Results & Implications).

We maintain our price estimate for State Street’s stock at $78, which is about 10% ahead of current market prices.

See our full analysis for State Street here

A quick glance through State Street’s dividend payment history shows that the bank raised its dividend at least once a year between 1995 and 2001, with the frequency doubling over the period from 2001 to 2008. But as is evident from the table below, State Street does not have a great record of returning too much cash to investors. The bank handed out less than $400 million in dividends at its peak dividend rate in 2008. The numbers nearby have been taken from the bank’s annual reports (see below).

State Street’s focus on returning money to investors in recent years is demonstrated by the fact that the custody bank has repurchased almost $3.5 billion worth of shares over 2012-2013. As a direct result, the average number of its outstanding shares has fallen more than 10% from about 500 million in 2011 to under 450 million in 2013.

(in $ mil) 2007 2008 2009 2010 2011 2012 2013
Common Stock Dividends 301 399 168 20 295 463 486
Shares Repurchased 1,002 675 1,440 2,040
Total 1,303 399 168 20 970 1,903 2,526

Assuming State Street’s board approves the dividend hike starting Q2 2014, the bank will pay shareholders $0.30 per share for three quarters this year – implying dividends of $1.16 per share for the year 2014. This points to a little less than $500 million in common stock dividends for the year, if the number of shares stays constant at 430 million (though it will likely decline). That combined with the proposed $1.7 billion share buyback plan means that the bank will return $2.2 billion cash to its investors this year. While this is 12% lower than the $2.5 billion figure for 2013, it is still the second highest payout by State Street in its history.

We represent these payouts in our analysis of State Street in the form of an adjusted dividend payout rate shown in the chart below. As this payout rate was not meaningful in 2009, we represent it in the chart as 0%.

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