Buying back stock could be on the increase, but Dick Bove, a noted stock market analyst, warns that this is something that banks should not be doing. The Hilton Capital Management’s chief strategist said on Friday on “closing Bell” that: “I strongly believe that buying stock back is a horrible thing for banks. It is like an oil firm giving away its oil for stock. That is not something you should not do. You do not give away capital in exchange for stock if you’re a bank.”
This year, public companies are anticipated to return more monies to shareholders in form of dividend increases and stock buybacks. Through late April, S&P 500 firms are on track, expected to give back to investors a record one billion dollars, reveals S&P Dow Jones Indices.
After going through the Federal Reserve tests last June, many major banks announced their plans to buy back a lot more of their own stock. Dick Bove says that the theory is that because already big banks cannot grow any larger, they may give away capital. “I do not believe that is true. We are looking at a time when the demand for money will grow exponentially, and the availability of the money will be declining,” he asserts. He proceeds to explain that, “that is because, currently, there is a “huge change” that’s going on within the financial industry.”
“If you needed money in the last 20 to 25 years, it was there,” Bove quips and adds that, “however, at present, the supply of money is not growing since the Fed has been shrinking its balance sheets.”
Now, the Federal Reserve is way into the processes of winding its 4.5-trillion-dollar portfolio that is known to be its balance sheet. The portfolio comprises, mostly, of government debts that have been accumulated over the years, especially after the major financial crisis.
Generally, the analyst is bullish on this present banking industry that has witnessed a very strong first quarter earnings season. “Banks are getting into the so-to-speak golden age where they can get an increase in earnings consistently unless, of course, there is a recession,” he details. “If there is a recession, they are dead. But without that, then I think that the earnings will be in some big upturn,” Bove adds.
Dick Bove also says that he particularly likes the smaller-cap financial institutions and banks that are “just killing” most of the big banks as regards stock performance. Between 2000 and 2017, the stocks of mid-cap banks were, in fact, up to 20% per year on average. During that period, the biggest banks were down, Bove recalls and adds that “there is no comparison whatsoever.” Bove’s top picks include Pinnacle Financial and Silicon Valley Bank that he calls a “massive winner”.
Big banks have increasingly been buying back stock, and others have announced their plans to begin the trade. However, many analysts like Dick Bove have pointed out the possible risks that this trend may pose. Perhaps, it is time banks seriously considered such risks.