Fed to Tell These Companies to Give More Money Back to Investors?

The U.S. banks may have had a strong hand in the Great Recession; taxpayers may have bailed them out; and the banks may have shrugged off the scorn of a frustrated nation—but that doesn’t mean investors should turn a blind eye to their recent performance.

Thanks to the Federal Reserve’s $85.0-billion-per-month quantitative easing policies and artificially low interest rates, the Dow Jones Industrial Average and S&P 500 continue to notch healthy gains.

And, perhaps not surprisingly, the financial sector has been, for the most part, running in step, up 19.0% since the beginning of the year and 45.5% over the last 12 months. The S&P 500 is up 18.8% year-to-date and just 27.6% over the last 12 months. During the same time periods, the Dow Jones increased 17.1% and 23.3%, respectively.

While the financial sector has made significant gains, many believe there is more room to run; especially in light of the fact that banks are soaring on tepid economic growth and nearly record-low interest rates. When the U.S. economy finally rebounds (with jobs and low unemployment), bank stocks could experience a serious run.

In fact, many publicly traded U.S. banks are nowhere near their pre-Great Recession highs. A return to those levels could reward patient investors.

Later this year, the U.S. Federal Reserve will be announcing the results of its mid-year stress test. On July 5, 18 large U.S. banks will be required to submit the results of their company-run, mid-year stress tests to the Federal Reserve. (Source: Board of Governors of the Federal Reserve System web site, May 13, 2013.)

The Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act (DFA) stress tests are regulatory tools used by the Federal Reserve to measure a bank’s ability to withstand a crisis. Not all banks are subject to the stress test—only those with assets of more than $10.0 billion.

Why does the stress test matter to investors? It is expected that those banks that pass the stress test will be allowed to give more money to shareholders in the form of dividends and share repurchase programs.

Investors wanting to add a large number of the largest U.S. bank stocks to their investing portfolio can do so through a variety of financial sector exchange-traded funds (ETFs). They can also add them to their portfolio individually.

While the following stocks are not the largest banks in the U.S., they could still experience strong gains on the back of a steadily improving economy.

Huntington Bancshares Incorporated (NASDAQ/HBAN) is the holding company for The Huntington National Bank. The company has more than 700 traditional and convenience branches located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. It has a market cap of $6.5 billion and a forward price-to-earnings (P/E) ratio of 11.1, and it provides an annual dividend of 2.7%.

Currently trading near $7.75, Huntington Bancshares Incorporated is up 18.1% year-to-date and 27.5% year-over-year. It was trading above $18.00 before the markets crashed in late 2007.

Regions Financial Corporation (NYSE/RF) is the holding company for Regions Bank. Over the years, it has acquired other financial service firms and currently has more than 1,700 branches in 16 states in the southeast. It has a market cap of $12.8 billion and a forward P/E of 10.5, and it provides an annual dividend of 1.3%.

The company is trading near $9.00 and is up 23% year-to-date and 46% year-over-year. Regions Financial Corporation was trading close to $31.00 before the Great Recession began.

The financial sector doesn’t appeal to everyone—for many reasons. Patient investors who would rather make money off them than stay mad could realize some strong gains.

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