We should see the release of Federal Reserve’s draconian stress test this week which should clear the path for many of the stronger banks to increase their dividends and share buybacks. It is important for these companies to be able to operate in the shareholders best interests, yet still follow all regulatory guidelines. For the economy to recover with more ferocity, lending must continue to ease, and that will only happen with more clarity in the capital rules.
From an investor’s perspective looking into the next 3-5 years, I find it difficult to find an industry more likely to be increasing dividend payouts, and growing earnings than the financial sector. While I certainly don’t expect this stress test to be the end all to raise valuations in the sector, I think it is clear that the banks are far stronger than they have been in decades, and over time the earnings power will shine through. Companies that used to earn 15-20% on equity might more likely earn 10-15%, but for patient, long term investors, now is a wonderful entry point for attractive future returns.