The Federal Reserve announced on June 24 that the 23 major US banks had passed stress tests to determine their performance under different recession scenarios. This has paved the way for companies to return capital to shareholders, with almost all banks announcing a significant increase in dividends after failing to do so last year due to uncertainty over the Covid-19 pandemic.

We’ll take a look at the three companies reporting the biggest dividend increases.

Goldman Sachs

The Goldman Sachs Group Inc. (GS, Financial) is one of the largest investment banking firms in the world, providing a range of services to its clients. The company generated nearly $ 45 billion in revenue in 2020 and has a market capitalization of $ 133 billion.

Following the results of the stress test, Goldman Sachs announced its intention to increase its dividend from 60% to $ 2 per share. While the company cut its dividend during the Great Recession, Goldman Sachs has now increased its distribution for 10 consecutive years. The dividend has a compound annual growth rate of almost 14% over the past decade.

Using the new annualized dividend of $ 8, Goldman Sachs has a return of 2.1%. This compares favorably to the average stock return of 1.5% since 2011. Only once since at least 2005 (2020) has the stock achieved an average return above 2% for an entire year.

Wall Street analysts polled by Yahoo Finance expect Goldman Sachs to earn $ 44.99 in 2021. That equates to an expected payout rate of just 18%. This rate is lower than the 10-year average payout ratio of 22%.

Goldman Sachs shares closed Friday’s trading session at $ 374.16. Using analysts’ estimates for the year, the stock has a forward price-to-earnings ratio of 8.3. Outside of 2011, when earnings per share fell drastically, stocks have an average price-to-earnings ratio of 9.6 over the past decade. Based on the historical valuation, the bank’s shares are undervalued by just over 15%.

However, the stock appears to be trading above its intrinsic value as calculated by GuruFocus.

Goldman Sachs has a GF value of $ 328.57, resulting in a price / GF value of 1.14. Stocks would need to fall 14% to reach intrinsic value. The title is rated as fairly rated by GuruFocus.

Goldman Sachs made the second highest dividend hike for any major US bank, an extremely bullish move in my eyes. The company appears well positioned to withstand new market uncertainties. The stock has returned nearly 90% in the past year, compared to the S&P 500 Index’s 38% gain, so the easy money was probably made in the name. That said, the return has only pushed Goldman Sachs just past its intrinsic value and the stock looks cheap compared to its history. Investors looking to enter the financial sector might see the recent increase in dividends as a bullish sign to buy Goldman Sachs.

Morgan stanley

Morgan Stanley (MRS, Financial) is a diversified global financial company providing underwriting, trading and merger acquisition services as well as comprehensive brokerage and asset management services. Morgan Stanley is valued at $ 171 billion and had $ 48 billion in revenue last year.

Morgan Stanley has announced plans to increase its dividend by 100% to 70 cents from 35 cents, which would extend its dividend growth streak to eight years. The compound annual growth rate of the dividend has been north of 21% since 2011, even with several years of discontinued distribution. The company also announced that it is increasing its share buyback authorization to $ 12 billion, or 7% of its current market capitalization.

The company’s annualized dividend of $ 2.80 translates into a forward yield of 3% at current prices. For context, Morgan Stanley has not averaged a dividend yield of this magnitude for a full year since at least 2005. Stocks have averaged 1.5% yield over the past decade.

Analysts expect the company to earn $ 6.91 per share this year, giving Morgan Stanley a projected payout rate of 41%. This is roughly double the average payout ratio of 22% since 2011, but not at a level where future dividend growth appears to be in jeopardy.

With the stock at $ 92.03 at the most recent close, Morgan Stanley is trading with a forward price / earnings ratio of 13.3. This is a slight premium over the stock’s average multiple of 12 times earnings since 2011. Returning to the average earnings multiple would mean a 10% reduction in the share price.

In addition, stocks appear to be considerably higher than their intrinsic value.


Morgan Stanley has a GF value of $ 63.17, which gives stocks a GF price to value ratio of 1.46. The stock is expected to fall 31% to reach GF value. As such, Morgan Stanley is considered significantly overvalued by GuruFocus.

Morgan Stanley was a name I had been bullish on for some time, although I viewed the stock as stuck earlier this year due to valuation. The dividend increase stands out, but the stock continues to trade at high valuations, both on a historical basis and relative to its intrinsic value. I remain cautious on the stock as it has returned nearly 93% over the past year and would wait for a pullback before adding it to my portfolio.

Wells fargo

Wells Fargo & Co. (WFC, Financial) provides services such as banking, investing, mortgages, and trade finance. The company is valued at $ 186 billion and had over $ 72 billion in revenue in 2020.

Wells Fargo cut its dividend by 80% in mid-2020 in order to raise its capital base amid the Covid-19 pandemic. The company announced that it would double its dividend from 10 cents to 20 cents. Even with the cut, Wells Fargo’s dividend had a 9.8% CAGR from 2011 to 2020. The company also announced that it would increase its share buyback authorization to $ 18 billion, or nearly 10%. of its current market capitalization.

With an annualized dividend of 80 cents, Wells Fargo posts a new return of 1.8%. The stock has historically offered a generous return, paying an average return of 2.9% since 2011. The most recent increase still places the annualized dividend at less than half of the pre-2020 reduction.

Wells Fargo is expected to earn $ 3.82 this year, implying a projected payout ratio of 21% using the new annualized dividend. Excluding last year due to the severe impact of Covid-19 on the company’s operations, Wells Fargo has an average payout rate of 36% since 2011.

The shares are trading at $ 45.07, which equates to a forward price-to-earnings ratio of 11.8 and nearly matches the long-term average multiple of 11.9 times earnings.

Wells Fargo also appears to be appropriately priced using the GF value.


The stock has a GF value of $ 44.50, giving Wells Fargo a GF price / value ratio of 1.01. Stocks are overvalued by 1.3% using intrinsic value. Wells Fargo is rated as fairly rated by GuruFocus.

Wells Fargo isn’t far removed from the cross-selling scandal, but that hasn’t stopped the stock from gaining 79% in the past 12 months. It should be noted that this comeback is lower than the other names discussed, so there could be some scandal overhang. Investors who held the shares before last year’s cut have yet to see their dividends paid in full, even after the company announced a 100% increase. Stocks are trading well below their long-term average, but the stock price appears to be appropriate given its historical valuation and GF value. For investors who can look past the company’s past mischief and recent dividend cuts, Wells Fargo may offer one of the best valuations in the financial industry.

Final thoughts

Dividend-growing investors with large financial institutions found themselves without a dividend increase last summer, with the Covid-19 pandemic weighing heavily on the industry. This summer has been a lot different as nearly every bank has passed the Federal Reserve’s stress tests and announced increases.

Goldman Sachs, Morgan Stanley and Wells Fargo announced the biggest increases. While some dividend-growing investors might be reluctant to own Wells Fargo so soon after a dividend decline, the size of each increase can be interpreted as a positive sign of each company’s respective health.