As bank dividends face uncertainty amid Fed stress tests, Goldman Sachs and Citigroup have show the stability investors look for when considering their next stock buy.
The US banking sector took a hit on Friday with stocks tumbling after the Federal Reserve highlighted potential vulnerabilities in a number of institutions. The central bank undertook a string of measures, including suspending buybacks and capping dividends through the third quarter after its recent stress tests. Banks are expected to announce any changes to their dividends after the bell Monday.
Nancy Tengler, chief investment officer at Laffer Tengler Investments, views Goldman Sachs and Citigroup as two of the major financial companies best equipped to weather the coronavirus pandemic and resulting economic slowdown.
“Goldman Sachs gets 96% of its revenue from noninterest income, which is a benefit in a flat to low-interest rate environment,” Tengler said Friday on CNBC’s “Trading Nation.” “Long term we like this story better than say a Wells Fargo that gets 20% of revenue from noninterest income, and is exposed to many of the spaces — autos and mortgages, autos in particular – that we don’t want to be part of.”
Despite having fallen 18% since the start of 2020, Goldman Sachs is a safer bet than Wells Fargo from a valuation standpoint. By comparison, Citigroup has rallied 18% this quarter. Both Goldman Sachs and Citigroup are among several financial institutions that confirmed they will maintain their current dividend. Wells Fargo said the Fed’s assessment of its business will warrant a reduction to its quarterly payout.
Goldman Sachs and Citigroup both have a strong earnings profile, continued performance, and highly liquid balance sheet that allows them to serve their clients, maintain dividend, and deliver for all stakeholders. Companies with a track record of rebuilding capital when necessary boast more dynamic capital management while helping clients and management continue to navigate challenging markets.
As the Fed continues to evaluate financial institutions’ planned capital actions relative to the most recent financial and macroeconomic conditions, some banks are better positioned to weather the storm. Goldman Sachs and Citigroup are currently two of the stocks to buy.