Here's How UBS' Dividend Yield Could Reach 10% By 2020

UBS Group AG (USA) (NYSE: UBS) has lagged its peers despite having assets under management of 3 trillion Swiss francs — a number that could only grow in the fourth quarter, according to Bank of America Merrill Lynch.

The firm gave a positive assessment of the company, assuming a 100 percent payout by 2020.

The Analyst

BofA Merrill Lynch analyst Andrew Stimpson issued an upgrade note on UBS on Friday.

The Rating

Stimpson upgraded UBS from Neutral to Buy and upped the price target from 18.50 francs to 20 francs. (See Stimpson's track record here.) 

The Thesis

The upgrade was premised on the investment banking, or IB, business remaining constrained and cash flow being returned to shareholders, Stimpson said.

See also: Deutsche Bank Shares Down 60% Over Last 3 Years: Everything You Need To Know About The Decline

Including the cash dividends, the total return is likely to be greater than 25 percent, Stimpson said. The analyst estimates the 0.6-franc dividend to double by 2019, with the payout expected to be 100 percent in 2020. This would mean a yield of 10 percent today, Stimpson said.

The expectation, according to the analyst, is supported by factors such as the capital remaining above future minimum requirements; decent underlying returns; and management's recognition that shareholders want more dividend, not a larger IB business.

BofA expects more revenue growth in the AuM-related businesses, given better market levels, a weaker franc and cross-border outflows being "almost finished," Stimpson said. With revenues in recovery, UBS is also deploying some technology solutions to reduce costs.

BofA raised its underlying earnings estimate for UBS by 2-5 percent, with its 2019 earnings per share estimate landing 10 percent ahead of the consensus estimate.

The Price Action

At the time of writing, shares of UBS were advancing 1.12 percent to $17.12.

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Photo courtesy of UBS.