RBC Capital Markets anticipates a dividend increase from SunTrust Banks Inc. (NYSE: STI) to come either in the second quarter or the third quarter of 2011. The brokerage expects the quarterly dividend to go to 8 cents a share (about 20 percent payout).

On Friday, SunTrust said it had received approval on its capital plan submitted to the Federal Reserve in early January as part of the Fed's Comprehensive Capital Analysis and Review process.

SunTrust also said it has commenced about $1 billion common stock offering, a key step in the company's planned repurchase of its preferred stock issued to the U.S. Treasury under the Troubled Asset Relief Program's (TARP) Capital Purchase Program.

SunTrust said it plans to use the net proceeds of this offering, together with those of a planned $1 billion senior debt offering and other available funds, to repurchase its $3.50 billion of Fixed Rate Cumulative Preferred Stock, Series C and $1.35 billion of Fixed Rate Cumulative Preferred Stock, Series D issued under TARP.

SunTrust was given approval to redeem all of the $4.85 billion in TARP outstanding, partially funded through $1 billion in new common equity and $1 billion senior debt.

"On Friday, 35.25 million shares were priced at $29.50 per share for an aggregate total of $1.04 billion in equity capital. This amount was lower than our estimate of $1.21 billion, and was priced earlier than our estimated date of mid June," said Gerard Cassidy, an analyst at RBC Capital.

The brokerage raised its 2011 operating EPS estimate for SunTrust to $1.37 from $1.30 and its 2012 estimate to $2.21 from $2.20. The brokerage maintained his investment rating of "outperform, above average risk" with a price target of $36.

Cassidy said that due to the lower common shares offered and earlier timing of the offering, the net transaction is accretive to his original EPS estimates. At current prices, Cassidy believes SunTrust's stock is undervalued.

On a fundamental basis, Cassidy has valued the company at $36 a share, but he also believes the company is viewed as an attractive acquisition target. Therefore in an acquisition, Cassidy believes the company could receive a price north of $45 a share in today's environment.

"In the meantime, as the company recovers, we expect the stock price to move higher as earnings approach normalization in 2013 of over $3.60 a share. We expect the company to increase its dividend in 2011 with it eventually reaching in excess of $1.05 a share when the company reaches normalized earnings," said Cassidy.

SunTrust stock is trading down 0.54 percent at $29.43 on the NYSE at 10:45 am EDT.

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