As a broker to Bank of Ireland, you would expect Davy to be well informed about the company. So when its analyst Diarmaid Sheridan put out a note yesterday about Bank of Ireland resuming a dividend payment in 2017, Cantillon sat up and took notice. This dividend would actually relate to full-year 2016, the results for which would be announced in late February or early March 2017.
Bank of Ireland is back in profit and generating substantial capital, two prerequisites for paying a dividend.
However, it is precluded from making a distribution to shareholders until it has dealt with the €1.3 billion in preference shares held by private investors. These were previously owned by the State, until a transaction in December 2013 allowed the Government to cash out. Sheridan’s thesis is that Bank of Ireland will deal with the preference shares next January.
Given the dividend would have to be paid from capital, the bank would also require approval from the Single Supervisory Mechanism (SSM), the arm of the European Central Bank now responsible for oversight of euro-area banks.
The SSM and the European Banking Authority are due to conduct stress tests next year of 50 to 60 European banks. It is likely but not certain that Bank of Ireland would be one of those tested, with the results due in late 2016.
Chief executive Richie Boucher would therefore be unlikely to get the green light from the regulator to pay a dividend until those tests were completed. Sheridan predicts a "modest initial dividend" of just less than 1 cent a share for full-year 2016. That would amount to an aggregate payout of about €300 million to investors. He sees this rising to 1.54 cent a share in the following year, amounting to a €500 million payment. This is potentially good news for the Government, which holds a near 14 per cent stake in the bank. If it retains these shares until dividend day, the State's coffers would be boosted by €42 million in 2017 and €70 million the following year, according to Sheridan's calculations.
You’d have to imagine that resuming the dividend payment would also make the bank’s shares more attractive to market participants, particularly income investors. All of which would suggest that the Department of Finance would do well to retain the State’s holding in Bank of Ireland for the foreseeable future.
