The generosity of First Gulf Bank (FGB) to shareholders has clearly piqued the market's interest in the stock.
FGB's payout - Dh1.5 billion to shareholders, plus a free share for every one held - was bigger than any other bank in the industry this year. And analysts from JPMorgan believe that similarly generous payouts could follow in the years ahead.
"We believe that in the next 1-2 years, FGB management will continue to maintain a high focus on enhancing future return on equity via distribution of a higher dividend payout," analysts from the bank wrote in a research note.
FGB has been the best-performing stock in the industry this year, rising 34.9 per cent since the start of the year. It is easy to be sceptical of the run-up that some stocks have experienced lately, a fact not lost on investors as FGB shares fell 1.1 per cent yesterday, underperforming the wider Abu Dhabi Securities Exchange General Index.
But analysts from Morgan Stanley said FGB's recent rise could also have further to travel.
The increased dividend payout "confirms our view that FGB management remains focused on addressing [the] bank's overcapitalisation and potential capital return to shareholders", analysts from the investment bank wrote in a research note.
Morgan Stanley says that at current valuations, FGB's share price factors in a 40 per cent dividend payout. But the bank could easily afford a 50 per cent payout, analysts from the bank said.
"In theory, based on its current Tier I base, FGB could afford 100 per cent payout on earnings and 15 per cent risk-weighted assets growth over the next five years and still hold a 9.2 per cent Tier I ratio, which would remain above the Central Bank's minimum requirement of 8 per cent," the analysts wrote.
Still, investors might want to be wary of getting carried away. The Central Bank's recent capping of Dubai Islamic Bank's cash dividend at 10 per cent - which would have exceeded a 50 per cent limit on dividends imposed in 2010, which is thought to have lapsed - is worth focusing on.
FGB is in a much stronger capital position than Dubai Islamic Bank. But the lack of clarity from the Central Bank should remind investors not to get ahead of themselves.
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