The Rally in Financials Is Just Getting Started
Welcome to the 'payout party'... Banks get the 'green light' to ramp up dividends and buybacks... Buffett's $12 billion payday... The rally in financials is just getting started...
It's a 'payout party' for the banks...
The Federal Reserve released the results of its annual "stress test" last week.
As expected, all 34 U.S. bank holding companies passed the Fed's Comprehensive Capital Analysis and Review. And all were given approval to boost capital payouts significantly.
And as Bloomberg reported, the biggest banks wasted no time in celebrating the news...
JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) led U.S. firms in unveiling plans to boost dividends and stock buybacks more than analysts had projected, after every lender passed annual stress tests for the first time since the Fed began the reviews in the wake of the 2008 financial crisis. Shares across the industry rallied in early trading Thursday.
JPMorgan, the nation's largest lender, said it's boosting its quarterly dividend 12% and may increase share repurchases to $19.4 billion over the next 12 months – roughly 90% more than in the prior year. Citigroup plans to double its dividend and may purchase up to $15.6 billion. Bank of America hiked its dividend 60% and will buy back up to $12 billion.
But it's not just the big banks that are having all the fun. All told, banks are set to pay out an average of 100% of their expected earnings over the next year, according to Bloomberg. This is up from just 65% last year.
Buffett's 'Hail Mary' pays off big...
The news also means a quick multibillion-dollar payday for Warren Buffett's Berkshire Hathaway (BRK).
Longtime readers may recall Buffett invested $5 billion in then-struggling Bank of America nearly six years ago. And the terms were especially favorable. As we noted following the news in the August 25, 2011 Digest...
By now, you've probably heard legendary investor Warren Buffett invested $5 billion in Bank of America. The bank's CEO Brian Moynihan said BOA doesn't need any capital, though he happily sells Buffett $5 billion of preferred shares paying 6%. This is expensive money for BOA. Where is it going to find 6% investments in this environment?
Moynihan didn't just sell Buffett a $5 billion piece of the company. He gave him 7% of the company for free, too. With about 10.13 billion shares outstanding, BOA also gave Buffett warrants to purchase 700 million shares, struck at $7.14 each. The warrants can be exercised in whole or in part within 10 years of the deal closing.
Following last week's big dividend raise, Buffett is finally ready to cash in those warrants... and is set to become Bank of America's largest shareholder in the process. As the Wall Street Journal reported on Friday...
Berkshire Hathaway said Friday that it would buy 700 million Bank of America shares via warrants at below-market prices, a deal that places the firm as the bank's largest shareholder.
The move was expected after the Charlotte, N.C., bank received permission from the Federal Reserve this week to boost its per-share dividend to 48 cents a year. Mr. Buffett has said a dividend of this size would prompt his company to swap its preferred shares into common stock.
When the bank raises its dividend, Berkshire Hathaway will use $5 billion worth of preferred shares to buy 700 million common shares at $7.14 each, well below the current market price of $24.32 and the overall current value of $17.02 billion.
Buffett's $5 billion investment has already earned nearly $1.8 million in preferred dividends alone over the past six years. When this transaction closes, he'll soon have another $12 billion in capital gains to go with it.
'The next leg of the rally begins now'...
Meanwhile, regular readers know our colleague Dr. David "Doc" Eifrig is bullish on the banking sector today. But he's not alone...
DailyWealth Trader editor Ben Morris is bullish, too. In fact, he originally recommended going long financial stocks back in February. Subscribers who took his advice are already up more than 10%.
But if you aren't among them, it's not too late. As Ben explained in yesterday's issue, he believes the next leg of the rally is about to begin...
For the first half of this year, they went almost nowhere... The market was digesting their big gains at the end of 2016. But that digestion period may have just ended...
On Monday, a handful of financial stocks broke out to fresh, multiyear highs. Many others aren't far behind. The group as a whole (as measured by the S&P 500 Financials Index) is up 6.9% over the past month... more than twice the returns of the next closest sector (a 2.8% gain for health care stocks).
As Ben explained, two former headwinds for financials – interest rates and politics – have recently turned into tailwinds. And he believes the biggest gains are still ahead...
Falling interest rates have put a strain on the banks for decades. Most banks borrow money at low short-term interest rates and lend it out at higher long-term interest rates. Starting in the early 1980s, both long- and short-term interest rates have fallen.
The yield on the 10-year U.S. Treasury (the benchmark for global interest rates) dropped from 15% down to less than 1.4% in mid-2016. The short-term federal funds rate dropped from as high as 20% in 1980 down to about 0% for the seven years ending in 2015.
Now, though, the Federal Reserve's Open Market Committee has raised short-term rates three times, up to 1.25%... And it expects to continue raising rates. The 10-year Treasury now yields 2.3%.
If the uptrend in interest rates continues, spreads will likely widen... and banks will benefit.
He also explained that last week's stress-test results are just a part of a bigger regulatory trend that is positive for banks...
On the political front, President Obama signed the Dodd-Frank Act into law in July 2010. The act restricts how banks invest their capital and limits their trading abilities. It makes it more difficult for banks to generate profits.
President Trump is acting to repeal at least parts of the Dodd-Frank Act, and to reduce regulations. It's a better political environment for banks, which are already navigating the rules well...
Stress tests are part of these regulations. During the tests, regulators try to determine how banks would perform in a crisis. They make sure the banks have enough cash and measure the impact they could have on other parts of the economy.
Last week, all major U.S. banks passed the stress tests. The banks got the go-ahead to return lots of cash to shareholders through dividends and share buybacks.
And while bank and financial stocks are up significantly from last November's lows, Ben noted that they remain a great value today...
Financial stocks are still cheap. The S&P 500 Financials Index trades with a price-to-book ratio of just 1.43. That's a 20% discount to its long-term average of 1.79.
With two major tailwinds supporting them, financial stocks could have much further to run... Monday's breakout could mean that the next leg higher in financial stocks has begun. And you don't want to miss out on the big potential gains.
You can get instant access to Ben's favorite way to profit from this trend with a 100% risk-free subscription to DailyWealth Trader. Click here for the details.
New 52-week highs (as of 7/5/17): Allianz (AZSEY), Alibaba (BABA), Becton Dickinson (BDX), Global X MSCI Greece Fund (GREK), PureFunds ISE Mobile Payments Fund (IPAY), JPMorgan Chase (JPM), U.S. Concrete (USCR), and Verisign (VRSN).
In today's mailbag, more on Porter and Steve's advice for a young subscriber... reader feedback on the auto industry... and an unusual request from a new subscriber. Send your questions and comments to feedback@stansberryresearch.com.
"Porter, your closing comments [yesterday], in the Digest, once again allowed us to see the real person. Kudos to you for your open, transparent communications. Reminded me of when your father passed and you showed some of your real self to us. In addition, there was a lot of wisdom in those few sentences. You showed that you understand that personal relationships, that come from shared experiences, are the real 'wealth' that one can hope to acquire. The rest is meaningless in the end." – Paid-up subscriber Howard S.
"'But you can always be kind.' Amen to that." – Paid-up subscriber Betsy B.
"Porter and team, I'd like to share some insight I've gotten yesterday and today from local mid-Michigan. I was at my brother's house for the 4th and was talking with his brother-in-law, a GM line worker. He has been working 6 days a week at the Flint GM truck plant and said they are scheduled 6 days of production [per week] for the rest of 2017 and they have some Sunday's scheduled as well. He told me that you can get a GM truck lease with 10,000 miles a year for $167/month payment! So much for backing off of the 170 days of inventory, down to 70 days by the end of 2017 that GM's CFO recently noted. My neighbor works at the Dodge Truck plant in Warren, Michigan. He is also working 6 days a week.
"Today I had to pick up some things from the new owner of my buddy's house. I'm guessing he was around 30 years old. He told me he was a real estate agent before getting a union job at GM in their shipping department. He said his family has done some house flipping in the past and he is getting ready to get back into it with them... I give this market 18 months tops before the wheels come off." – Paid-up subscriber Kevin M.
"[Dr. Sjuggerud]: I have read your articles about your 'Melt-Up' thesis. I have recently subscribed to your service. I have $10,000 'play money' with which to speculate. Please supply me with the name of at least one stock you, personally think is a good speculative 'Melt-Up' investment. If you wish to keep your recommendation confidential, I will not disclose the fact that you recommended the stock. Thank you." – Paid-up subscriber Walt Harasty
Brill comment: Sorry, Walt. As always, we're prohibited from giving individual investment advice. And frankly, your request wouldn't be fair to Steve's other subscribers, even if we weren't.
Fortunately, you can find exactly what you're looking for in the services to which you've just subscribed... including Steve's favorite "one click" way to profit from the "Melt Up." (You'll find that recommendation in the June issue of True Wealth Systems right here.)
And for anyone who isn't yet a True Wealth Systems subscriber, there's still time to take advantage of last week's incredible offer. For one more day only, you can claim two full years of True Wealth Systems at a massive discount... and get access to Steve's $3,000-per-year True Wealth China Opportunities AND Porter's $6,000-per-year Stansberry's Big Trade service, for FREE. Click here to sign up now.
Regards,
Justin Brill
Baltimore, Maryland
July 6, 2017