What’s Going On Here?The US Federal Reserve (the Fed) announced late on Friday that it’ll finally let the country’s banks resume share buybacks next quarter, even if they can’t turn off at Dividend Town just yet. What Does This Mean?Earlier in the year, the Fed – along with other major central banks – capped how much banks could pay in dividends, while banning them from buying their own stock altogether. That way, they’d have enough money on hand if things got really bad.
Now, though, the Fed’s loosening up those rules. See, the central bank regularly tests how banks perform under doomsday scenarios to make sure they’d be able to keep lending to households and businesses, and in turn keep the economy ticking over. And after these latest so-called “stress tests”, the Fed decided that the country’s banks were robust enough to buy back their own shares again – within limits. Why Should I Care?Zooming in: Don’t mind if I do.
When a company buys back its own stock, it reduces the number of shares that are publicly available even as its earnings stay the same. That means its earnings per share will be higher, and its price per share should be too. So just like dividends, the overall aim is to pay shareholders back for their loyalty.
For markets: Play it cool, guys.
To say banks were eager to increase shareholder payouts is an understatement: JPMorgan Chase – the biggest US bank by assets – announced it’d buy back $30 billion of stock next year within minutes of the Fed’s announcement. And to say investors were eager to have them is another understatement: the biggest US banks saw their stocks jump on the Fed announcement. Share buybacks typically make up 70% of the money paid out to shareholders, so the prospect of better returns should lure investors back to a sector that’s underperformed the broader stock market this year (tweet this). | 