Apr 4 2014, 12:52pm CDT | by Forbes
Morgan Stanley’s investors have waited five years for the investment bank to recover from losses in the aftermath of the economic downturn, and then to complete reshaping its business model around its wealth management operations before it can finally begin returning significant capital to them. The wait is finally over, with the bank receiving the Federal Reserve’s approval to double its quarterly dividends for the first time since Q1 2009 – when it set them at their current 5-cents-a-share level – and also to repurchase shares worth up to $1 billion by the end of March 2015. Given the bank’s roughly 2 billion outstanding shares, this capital plan entails a payout of about $1.8 billion over the next four quarters.
Although this figure is well below the roughly $5 billion in dividends and share repurchases for Morgan Stanley each year over the 2005-2007 period, it is three times the amount it has handed out annually between 2009 and 2011 and is an important first step by the bank to improve its payout ratios over coming years.
Historically, Morgan Stanley focused considerably on returning cash to investors – something that was a common trend among investment banks prior to the economic downturn. Like its competitors, Morgan Stanley preferred to do so not by paying out a high dividend each quarter, but by buying back shares worth billions of dollars each year. This is evident from the fact that the bank’s increase in quarterly dividends between Q1 2000 to Q1 2009 was not sizable, but by the end of this period the bank was routinely spending three times the amount it handed out as dividends to repurchase shares.
The table below puts things in perspective, as it summarizes Morgan Stanley’s capital return figures for each year since 2005. The data has been compiled using figures reported in annual reports:
|(in $ mil)||2005||2006||2007||2008||2009||2010||2011||2012||2013|
|Common Stock Dividends||1,180||1,148||1,151||822||623||275||542||373||379|
The disparity in Morgan Stanley’s payout to common shareholders before and after the economic downturn stand out clearly here. But a poor operating performance over the period was not the only factor to blame for this. The bigger reason was that Morgan Stanley was directing its cash to acquiring 100% of the Smith Barney brokerage business form Citigroup. In fact, once the bank completed the acquisition early last year, its plan to buy back $500 million worth of shares was approved by the Federal Reserve within a couple of months.
But the real boost to investor payouts is no doubt seen in this year’s capital plan. Based on our estimates that the bank will report a net income of $3.8 billion this year, the proposed plan represents a payout ratio between 45-50% for this year. We represent dividend payouts in our analysis of Morgan Stanley in the form of an adjusted dividend payout rate, as shown in the chart below. As this payout rate was not meaningful in 2008, 2009 and 2012 we represent the figure for these years in the chart as 0%.
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