Morgan Stanley (NYSE:MS) ended the last session bright and cheery after the Federal Reserve okayed its revised dividend and stock-buyback plans. The stock rose by over 6% to close the session happily at $37.09 as the Fed said that it had no objection to Morgan Stanley’s idea to triple stock buyback program. Earlier, the Fed had disapproved Morgan Stanley (NYSE:MS)’s stock buyback program as it would have left the U.S. bank undercapitalized at times of a severe recession.
Read what this analyst has to say about the fundamentals of MS.
Tripled buyback plan
Beginning this year, the Fed introduced two new changes to its annual “stress test” namely a steep fall in stock prices and more volatility. The inclusion of the new changes battered the capital ratios of the bank that runs a big trading business. Unlike JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS) does not own huge consumer or commercial lending businesses to balance the impact of the market test.
But, now, the bank has the green signal from the Fed to proceed with its intended $3.1 billion share buy back in between the second quarter and the same period next year. The bank gave hint that it might also raise its quarterly dividend to $0.15 per share for $0.10 per share.
Revised initial plans
While the rival Goldman Sachs Group Inc (NYSE:GS) has not been such a success in flying the Fed’s annual test with flying colors, Morgan Stanley (NYSE:MS) survived the financial crisis with comparatively less secure footing. The bank’s reasonable dividend and buyback plans indicate of its slow but improving recovery. But, the bank faces equally higher expectations from its investors, who have been waiting keenly to see their dividends and stock buybacks rise.
Morgan Stanley (NYSE:MS) had to take the Fed’s rejection for its initial share buyback plan as it failed to pass the test that measured the total risk-based capital ratio. Its initial plan drove the capital ratio of the bank down to 7.4% against the minimum requirement of 8%. But, the revised plan achieved capital ratio of 8.2%.