Is Morgan Stanley Dividend Stock for You?
The Federal Reserve announced last week that the 23 major U.S. banks that performed its most recent stress tests have passed with flying colors, meaning they have enough capital and liquidity to continue lending in a serious economic downturn (you know, like the one we had last year).
The Fed said the largest US banks are in good shape and are “strongly positioned to support the ongoing recovery,” according to Fed vice chairman for oversight Randal Quarles.
This week, most of the major banks responded to the Fed’s report by announcing dividend increases and share buybacks for the third quarter, as many had been forced to scale back any increase or share buyback program due of the pandemic. The bank that made the most noise is Morgan stanley (NYSE: MS), which announced on June 28 that it had doubled its quarterly dividend.
This type of increase should surely catch the attention of investors. But is Morgan Stanley the dividend paying stock for you?
Morgan Stanley pulls full blast
Morgan Stanley doesn’t need a lot of introduction to most investors. It is one of the largest investment banks in the world and among the leading asset managers and wealth management companies. The company achieved record sales in 2020, driven by its investment banking and institutional trading activities. It also made two huge acquisitions, Eaton Vance and E * Trade, to strengthen its investment management and wealth management businesses, respectively.
It also had a strong first quarter, posting record revenue and net income. Revenue increased 60% year-over-year to $ 15.7 billion, while net profit more than doubled to $ 4.1 billion, thanks to continued strength investment banking and commerce, as well as the growth of investment management and wealth management due to the integration of acquisitions.
He increased his return on average tangible equity, which is a measure of a company’s physical capital, to 21.1%, from 9.7%. In addition, its ratio of Class 1 common stock, which assesses the company’s creditworthiness and its ability to withstand economic shock or loss, is 16.7%, which is well above the regulatory minimum of 4.5%. This growth and expansion has pushed the share price up 32% since the start of the year.
A 100% dividend increase
Due to its earning power and capital strength, Morgan Stanley will double its quarterly dividend in the third quarter from the current $ 0.35 per share to $ 0.70. This works out to $ 2.80 per share per year, down from $ 1.40.
CEO James Gorman released a statement saying:
Morgan Stanley has accumulated significant excess capital over the past several years and now has one of the largest capital buffers in the industry. The action taken by the board reflects a decision to reset our capital base in line with the needs we have for our transformed business model. In particular, Wealth Management and Investment Management provide stable and sustainable earnings which support a significantly higher payout ratio. Going forward, we remain amply capitalized to continue our growth.
The change marks the first dividend increase for Morgan Stanley since the third quarter of 2019, when it went from $ 0.30 per share to $ 0.35. Currently, it has a return of 1.5%, which is roughly the average over the S&P 500 but is weak for the financial sector. Performance has remained within this range consistently over the past five years. The payout ratio is very low at 20%, which is as low as it has been in the last five years.
While the 100% increase may seem high, it appears to be sustainable given its low payout ratio and strong financial results and earnings. With the new dividend taken into account, the yield would currently double to around 3%, if you divide the stock price by the annual payout per share. The payout ratio would reach around 40%, based on an annual dividend of $ 2.80 per share and estimated earnings per share of $ 7 for 2021. It’s still a very manageable payout ratio, reckoning. given Morgan Stanley’s leadership position and earnings outlook.
So Morgan Stanley went from a fairly average dividend stock to a great dividend stock with this increase. But it’s not only a great dividend-paying stock, it’s also a good buy overall that should generate both income and capital appreciation for years to come.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.