Morgan Stanley and Goldman Sachs Just Approve Significant Dividend Hike
- Banking giant Morgan Stanley just doubled its dividend from $ 0.35 to $ 0.70 per share;
- Goldman Sachs Raises Dividend 60% To $ 2 Per Share;
- Both banks successfully coped with the crisis caused by the pandemic and showed record profitability in the first quarter.
In 2021, bank stocks are undergoing a renaissance, recovering from a difficult 2020 that went down in history under the flag of the coronavirus pandemic. Then things got so bad that the Federal Reserve System (US Federal Reserve) prohibited banks from increasing dividends on their shares so that they could preserve capital and liquidity during a recession.
This moratorium was lifted in early 2021, when banks began to recover rather quickly amid a growing economy. Combined with prudent fiscal management (which most banks implemented last year), this has resulted in banks having enough surplus cash to spend on raising their dividends.
In particular, there are two financial giants that stand out for their huge dividend increases in 2021 – Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS). One has already announced a doubling of its dividend, while the other is planning to do so.
1. Morgan Stanley doubles its dividend
Although Morgan Stanley is a commercial bank, this segment of its business is relatively small compared to its other divisions:
- Investment banking (investment banking);
- Institutional trading (institutional trading);
- Asset and wealth management (asset and capital management).
Thus, unlike larger commercial banks, which were hit last year and were forced to set aside billions in reserves, Morgan Stanley achieved record revenues in 2020 from its investment banking and institutional trading operations – the two sectors in which they are the market leaders. The share price has increased by 38% over the past year.
Things got even better in the first quarter of 2021 as Morgan Stanley’s revenue grew 60% (year on year) to a record $ 15.7 billion. Net income doubled to $ 4.1 billion as the Investment Banking and Institutional Trading divisions demonstrated robust performance and the Asset Management and Wealth Management division grew with its acquisitions of E * Trade and Eaton Vance last year. Since the beginning of the year, the share price has already increased by about 31%.
Morgan Stanley’s financial strength is measured by its return on average tangible common equity (return on average tangible common equity) compared to 9.7% a year ago and its Tier 1 Common Equity (CET1) ratio of 16.7%, which is much above the required minimum of 13.2%.
Strong earnings with solid revenues from all segments and a capital buffer were two factors that influenced the company’s decision to double its quarterly dividend in the third quarter from $ 0.35 to $ 0.70 per share. “Morgan Stanley has accumulated significant excess capital over the past few years and now has one of the largest reserves in the industry.”– said CEO James Gorman during the announcement of the decision to double the dividend. He added that the company has “Sufficient stable profit that supports a significantly higher payout ratio”…
This increase in dividend payout will double the share yield to about 3% and the payout ratio will rise from 20% to 40%. Now is a great time to get in before the dividend doubles this quarter.
2. Goldman Sachs Approves Significant Dividend Hike
Like Morgan Stanley, Goldman Sachs is in commercial banking, but most of its revenue comes from investment banking, institutional trading, and asset and wealth management. And, as for Morgan Stanley, 2020 was a very successful year for it, which was largely facilitated by the areas of investment banking and institutional trading. Goldman Sachs and Morgan Stanley are the two largest investment banks in the world, along with JPMorgan Chase.
In 2020, Goldman Sachs had the most announced and completed mergers and acquisitions of any firm, and this year also marked a record underwriting for stocks. Goldman Sachs generated a record $ 17.7 billion in revenue this year in the first quarter, more than double its previous year. First quarter net income was also a record $ 6.8 billion, or $ 18.60 per share.
The company’s financial performance is also in good shape:
- The CET1 ratio at the end of the first quarter was 14.2%, higher than the required minimum of 13.4% set by the Fed;
- The company’s annual return on equity is 32.9%;
- Operating margin is 44%;
- Operating cash flow is over $ 34 billion.
At the end of June, Goldman Sachs announced its first dividend increase since the second quarter of 2019. The company announced an increase in its quarterly dividend from $ 1.25 to $ 2.00 per share in the third quarter, up 60%. Over the past five years, Goldman Sachs has increased its dividend annually by an average of about 14% (excluding this most recent increase). If dividends increase by the same 14% in the next two years, the company will effectively double their size within two fiscal years.
Conclusion for the investor
These are not just stocks with excellent dividend income, they are also an amazing long-term investment. Morgan Stanley and Goldman Sachs are colossus that attract investors by far more than huge increases in dividends.
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