Mike Mayo Says ‘Move Over Utilities’ as Banks Ace Stress Tests

(Bloomberg) -- Mike Mayo says it’s time for utility stocks to make way, as successful Federal Reserve stress tests and large dividend increases are adding to the idea that big banks are stable.

“Banks are directionally moving towards utilities, especially with a pro forma dividend yield (3%) that is close to the yield of the S&P Utilities ETF (3.1%), while having similar ROEs,” the Wells Fargo bank analyst wrote in a note. The opportunity, Mayo said, is that “banks trade at only about half the P/E (11x vs 21x).”

Last month, Wells Fargo equity strategist Chris Harvey saw low-volatility fund potential for banks.

The biggest U.S. banks, including Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc., rallied in Friday morning trading to the highest in more than a month, after the Fed cleared them to boost payouts.

Read more: Banks Soar as Fed Paves Way for Better-Than-Expected Payouts

The key takeaway from the results of this year’s Capital Analysis and Review, known as CCAR, was that capital return should increase by one-fourth compared to last year, “well above expectations in aggregate and for almost every bank,” Mayo wrote.

To contact the reporter on this story: Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm, Will Daley

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