Analysis: MS

Following the results of the latest bank stress tests, better known as CCAR 2022, last night Morgan Stanley (MS) announced both an 11% dividend hike as well as new multi-year stock repurchase program that has no expiration date and could span up to $20 billion.

In the recent past we've seen banks and related financial institutions that have passed the stress tests announce similar events and following four quarters of its most recent dividend, Morgan's dividend hike isn't that much of a surprise.

The 11% bump in the dividend brings it to $0.775 per share per quarter or $3.10 on an annual basis and continues the company's propensity to periodically boost this form of returning capital to shareholders.

Given the implied understanding that dividends are expected by shareholders to be paid for the long-term, we see this dividend as well as the significant increase in the last one to $0.70 per share per quarter from the prior $0.35 per share per quarter one, being enabled by the company's increasing fixed fee businesses and growing assets under management (AUM).

As the company executes on its targeted plan of raising that AUM base to $10 trillion in the coming years from $6.5 trillion exiting 2021, odds are we are likely to see additional dividend increases along the way.

Buyback Program

In terms of the buyback program, like a number of other companies, we see the Morgan Stanley utilizing that to support its shares. The magnitude of the program is rather large and if enacted in full it has the potential to shrink Morgan's outstanding share count by ~15%. However, like many buyback plans it's a question of how much of that buyback cannon will be fired and how quickly.

Given the year-to-date performance of industry wide investment banking business, we suspect Morgan will be active with its buyback program at least until that window for that business opens wide. While that effort should help support MS shares, it doesn't goose the top line in any way.

With the investment banking calendar poised to be quiet through the balance of the summer, we're revisiting expectations for Morgan and reducing our price target to $105 from $120. At the current share price, we would argue that slowdown is largely priced into the shares and again there is the new buyback that should limit much further downside.

Longer-term when M&A activity heats up and the IPO as well as secondary offering market rebounds, Morgan Stanley's rankings in both as well as its global reach should see that business rebound nicely. When that happens, Morgan should see meaningful operating leverage on top of its growing fixed fee and AUM related businesses.