Goldman’s Buybacks May Not Be So Stressed
Stock may be pricing in a capital return that’s too small
Despite having to revise its capital plan to pass the Federal Reserve’s stress test, Goldman Sachs Group may have quietly secured its place at the head of the class.
Some analysts have interpreted the fact Goldman had to revise its capital-return proposal as pointing toward lower buybacks this year. But there is good reason to think the capital return plan approved by the Federal Reserve Thursday likely exceeds estimates. So Goldman’s stock may be pricing in too small a capital return.
Following the release of Fed verdicts on bank capital plans Thursday, Goldman said it had received approval to raise its quarterly dividend to 65 cents from 60 cents. But it kept mum about the level of share repurchases the Fed approved.
Goldman Sachs, led by CEO Lloyd Blankfein, said it had received approval after the Federal Reserve “stress tests” to raise its quarterly dividend to 65 cents from 60 cents. ENLARGE
Goldman Sachs, led by CEO Lloyd Blankfein, said it had received approval after the Federal Reserve “stress tests” to raise its quarterly dividend to 65 cents from 60 cents. PHOTO: AGENCE FRANCE-PRESSE/GETTY IMAGES
Given this, analysts and investors have tried to estimate Goldman’s buybacks based on stress-test data and the differences between the initial and revised request. This has led some to conclude that although Goldman’s dividend increase was approved, it likely had to reduce its buyback program below last year’s $5.5 billion level.
That would be odd. It’s clear the Fed has an implicit preference for buybacks over dividends, on the basis that banks more readily reduce repurchases than dividends during times of stress. As well, it is a mistake to assume the Fed would penalize Goldman for having to revise its proposal. That is now a normal part of the process and doesn’t earn regulatory demerits.
More important, the improvement in Goldman’s capital ratios seen from its initial and its revised proposals don’t automatically indicate smaller capital returns. Goldman appeared to have initially requested a combined capital return of $6 billion to $8 billion. The low end would imply a buyback program smaller than last year’s—and the revised plan would be even smaller. Some analysts see buybacks falling to about $4 billion.
Things probably aren’t so dire. The stress test measures capital adequacy quarter by quarter, with some periods putting more stress on earnings and assets than others. So, some improvement in Goldman’s test scores likely came from a change in the timing of its planned payouts rather than reductions in their overall amount.
Given this, it seems likely Goldman was approved for capital actions above last year’s combined $6.5 billion. This would mean the firm should be able to maintain its payout ratio of around 80%—putting it well above big-bank peers.
That could lead to a happy surprise for the stock as the year, and the buybacks, proceed.