Stock Rehab: Bank of America

Bank of America (NYSE: BAC  ) needs to go to rehab.

Shares are trading near where they were in 1996. Where'd the 12 years of prosperity, acquisitions, and globalization success go? Credit market mayhem and real estate pandemonium make up the bulk of the losses, but there's more. You don't need to be Sigmund Freud to realize that markets -- especially the financial sector -- are being held hostage by a complete and utter bout of psychological trauma. Until the market gets back on track (might not be for a while), what companies are perceived to be doing is probably more important than what's actually going on behind the scenes. Need proof? Ask the bamboozled executives at Bear Stearns.

B of A could quickly and easily boost its perception in the market and save boatloads of cash immediately. How? Slash its dividend.

Call it reverse psychology, if you will
With a current yield of more than 11%, investors clearly have a much different perception of the company than CEO Ken Lewis, who "views the dividend as safe." There's only one reason investors would bid a stock so low that its dividend yield balloons to double digits -- because they think it's a fat chance the checks will keep coming for much longer. Last month, I wrote that it would behoove many banks to keep the dividends going just to let shareholders know the lights are still on. Bank of America is well past this point; its 11% dividend is turning into a symbol of impending trouble.

So now Lewis is in a sticky situation. Investors have clearly voted with their sell orders: They think he's full of baloney. They're not buying his claim that the dividend is safe. They don't think a turnaround is right around the corner. They think there's trouble lurking ahead. With that kind of attitude, skittish investors are likely asking themselves, "If B of A is trying to butter us up by expecting us to believe the dividend is safe, what else is it trying to hide?"

Of course, Lewis might be right; the dividend could very well be safe. Taking your marching orders from shareholders drowning in fear is probably a bad idea, too. But let's be honest, it's more than reasonable to assume B of A is going to need to raise capital in the coming years -- maybe in large amounts. Lehman Brothers (NYSE: LEH  ) has had to raise capital in recent months solely to scare away short-sellers who thought the company wasn't coming clean -- and had to do so with a pathetic stock price. When it comes time to sell stock and raise capital, B of A's going to want to have shareholders' trust on its side.

Don't get me wrong. I think Bank of America is a wonderful company with a strong brand name. It's got some seriously choppy waters to deal with, but once the smoke clears and the banking industry crawls out of the hole it's in, B of A is more likely than not to make it out alive.

This country will forgive anyone with enough pride and audacity to step forward and admit they made a mistake and are in trouble. However, tell one little white lie, or bend the truth in the slightest way, no matter how small it is, and it's off to the gallows. Ask Martha Stewart about this. Citigroup (NYSE: C  ) , UBS (NYSE: UBS  ) , Washington Mutual (NYSE: WM  ) , and Wachovia (NYSE: WB  ) are all purging out the mess faster than investors can keep up with it.

It's your turn to come clean, Bank of America.

Related Foolishness:

Fool contributor Morgan Housel isn't losing faith in Bank of America just yet. He doesn't own any financial positions in the companies mentioned in this article, long or short. Bank of America is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (7)

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  • Report this Comment On July 11, 2008, at 3:41 PM, Stocklovr wrote:

    I'm a little confused. BAC should slash the dividend to give investors the hand-holding that they obvioulsy need. This new confidence will prevent the stock from sliding further down and everyone will feel much better (except income investors!)?

    Ahhh... like it worked for Citi, WAMU, and all the ofther banks that have already slashed their dividend? Seems to me they are still in free fall AND with much lower payouts.

    When BAC slashes their diividend, those who need reassurance will feel better. And what about the dividend investors? Can you say sell, sell, sell. That's what they'll do and that will drive the stock price even lower.

    Unless we know their business better than they do, why don't we let them run it? The financial turmoil won't last forever. I don't see anything positive happening until we see some financial healing, no matter what they do with the dividend.

  • Report this Comment On July 11, 2008, at 6:35 PM, MooBaby17 wrote:

    I agree with Stocklovr. I am a a BAC shareholder because of their solid dividend paying history. If BAC slashes that lovely dividend, and one of the primary reasons it occupies a place of honor in my portfolio, it definitely will not instill me with a great deal of confidence; quite the contrary! A great company never take its eyes off the shareholder, especially in times such as these. I don't need them to hold my hand, I need them to remember who they work for and make decisions accordingly. Keep that BAC dividend making history and sacrifice from the TOP down to ease the pain!

  • Report this Comment On July 11, 2008, at 6:49 PM, jlmcconchie wrote:

    I do not know whether or not to believe BAC when it says that its dividend is safe, but I believe I know one thing for certain. If BAC gets through this mess without cutting its dividend, it will shine like a towering light in the decades ahead. Its reputation for honesty with its shareholders and steadfastness in the face of adversity will make it a "must buy" among the major banks. Perhaps it was necessary for Washington Mutual to essentially eliminate its dividend. But I will never touch the stock again. The reaction of many of us, I predict, will be the opposite in the case of BAC if they retain their dividend through this crisis.

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