Why Banks Are Doing Buybacks By Lawrence C. Strauss March 30, 2018 8:00 p.m. ET PHOTO:ISTOCKPHOTO Financial firms in the S&P 500 have been on a big buying spree lately, and it isn’t about mergers and acquisitions. It’s all about their stock. These firms repurchased $124.5 billion of their shares last year, up nearly 20% from $104.4 billion in 2016, according to S&P Dow Jones Indices. Financials led all of the 11 S&P 500 sectors in buybacks in 2017, followed by technology ($119 billion), consumer discretionary ($83.6 billion), health care (nearly $65 billion), and industrials ($53.6 billion). “Banks have finally built up excess capital,” says James Sinegal, senior equity analyst at Morningstar, adding that these firms “are finally where they need to be from a regulatory standpoint.” NEWSLETTER SIGN-UP Some of the nation’s very largest banks—among themJPMorgan Chase(JPM),Citigroup(C),Wells Fargo(WFC), andBank of America(BAC)—figured prominently in these totals. In the fourth quarter alone, Citigroup repurchased $5.5 billion of its stock, second only toApple(AAPL), which spent $10.1 billion for that purpose over the last three months of the year. While companies have a lot of latitude in deciding how much of their own stock to acquire from one quarter to the next, “a dividend commitment is harder to change,” says Sinegal. Hence the slow progress in dividend increases and payout ratios for these firms since the crisis. In all, Citigroup acquired nearly $15 billion of its stock in 2017, up from $9.6 billion the previous year, and it has been boosting these expenditures at a good clip since 2013. However, its quarterly dividend, which held steady for a long time at a penny a share, didn’t increase until 2015. It’s now 32 cents a share, and the stock yields a respectable 1.9%. Big buybacks have not been unique to Citigroup. Wells Fargo spent $10.3 billion last year, compared with $8.6 billion in 2016. JPMorgan Chase paid $15.4 billion, versus $9.1 billion previously. And Bank of America more than doubled its repurchasing activity last year to $12.8 billion. Is this a smart capital-allocation strategy for the financials? Morningstar’s Sinegal doesn’t believe large bank stocks are overvalued. JPMorgan Chase recently fetched 12.2 times this year’s profit estimate, versus 10.6 times for Citigroup, 11.7 times for BofA, and 11 times for Wells Fargo, according to FactSet. The S&P 500 was trading at about 16.6 times. The largest banks, he says, “still are at very reasonable multiples, compared to the overall market.” Last year, they paid out about 75% of their income in dividends and share buybacks, based on his calculations. As for how much buybacks can increase from these levels, it depends “on increases in income, which are likely to be relatively modest,” Sinegal says. “However, excess capital is building.” It’s important to remember that loan growth, a key driver to banks’ growth, hasn’t been robust. Still, if certain regulatory requirements are loosened—such as the annual Comprehensive Capital Analysis and Review administered by the Federal Reserve—“we could temporarily see larger buyback programs,” says Sinegal. The Trader:Dow Gains 569 Points but Falls for the Quarter Follow@lawlcs https://www.barrons.com/articles/why-banks-are-doing-buybacks-1522454400