The dividend jumped to $4 per share, from $3.
While bank earnings have been solid, although somewhat mixed so far in Q2, Goldman Sachs (NYSE:GS) earnings were neither. The investment banking powerhouse delivered stellar results in the second quarter that blew away estimates.
It also raised its dividend by a massive 33% from $3.00 per share to $4.00 per share. The last time it raised its dividend that much was in 2021, coming out of the COVID pandemic.
In raising the dividend, Goldman Sachs’ yield went from about 1.71% to 2.28%, which means more money in the pockets of shareholders. It also has a low payout ratio (percentage of net income that goes to dividend) of 27%, which suggests that there is plenty of room to raise the dividend going forward.
“Our board approved a 33% increase in our quarterly dividend to $4 a share, which underscores our confidence in the durability of our franchise,” Goldman Sachs Chairman and CEO David Solomon said on the earnings call. “Since 2018, we’ve increased our quarterly dividend by 400%.”
Playing catch-up
Solomon said it has been a conscious effort to play catch-up with some of the other large financial institutions.
“Unlike a number of our competitors, that you would benchmark us to, we started from a very different place,” the CEO said. “Five, six, or seven years ago. And we had a nominal dividend and we’ve been kind of growing into it as we’ve been growing the firm.”
While Solomon said investors shouldn’t expect a 33% increase every quarter, the firm is committed to having a sustainable, growing dividend.
“There is room for us to continue to drive that dividend higher,” Solomon said.
Blowout quarter
The huge dividend increase, along with $3 billion in share buybacks, was made possible by Goldman Sachs’ strong quarter that highlighted by record equity trading revenue and strong investment banking income.
The firm generated $14.6 billion in revenue in Q2, which was up 15% from the same quarter a year ago. It easily crushed estimates of $13.5 billion.
Net earnings soared 20% to $3.5 billion, or $10.91 per share, which dwarfed estimates of $9.53 per share.
Goldman’s global banking and markets segment generated most of the revenue, about $10.1 billion, up 24% year-over-year.
The global banking and markets division includes the company’s investment banking business as well as its trading operation. Golman Sachs ranks first in announced and completed M&A deals in the first half of the year, which resulted in $2.2 billion in investment banking fees – a 26% increase from a year ago. The backlog of deals has risen for five straight quarters and is up significantly year-over-year.
“The metrics that we have that we can see backlog, new business opportunities, are up,” Solomon said on the call. “And it feels like we’re entering a period of a higher level of activity, and we’re seeing that in the accruals.”
In addition, the company set a record for equity trading revenue, bringing in $4.3 billion – a 36% year over year raise. Clients were actively repositioning and managing their portfolios in a very volatile, yet strong Q2 for stocks.
Sizable upgrades
Goldman Sachs stock got some large price target upgrades prior to earnings from Keefe Bruyette and Wells Fargo, which saw an improving environment for the bank amid deregulation, lower capital requirements, and a better M&A market.
The median price target is $704 per share, which is less than 1% higher than the current $701 per share price. But the stock has already gained 22% YTD and 39% over the past year. And it is still reasonably valued at 16 times earnings.
I tend to side with Wells Fargo and Keefe Bruyette, which see about 10% upside for Goldman Sachs stock. The added total return boost from the massive dividend raise will certainly help.
