Bank Dividends Are Dead

You could have seen this coming.

Wells Fargo (NYSE: WFC  ) cut its dividend to $0.05 per share last week in a move to save capital -- in this case, about $5 billion per year.

Surprised? Most weren't. Wells' share price at the time priced in a yield greater than 15%, meaning investors were all but certain a cut was coming.

Wells Fargo was also the last major commercial bank to concede that, yes, the banking world is in shambles, and capital needs to be preserved. Short of regional banks like BB&T (NYSE: BBT  ) and (what used to be) investment banks Morgan Stanley (NYSE: MS  ) and Goldman Sachs (NYSE: GS  ) , every major bank has slashed its payout to meaningless levels, if not eliminated it completely.

Most banks currently pay nothing more than a token dividend of a few pennies per share per quarter. By hacking dividend payouts down, they can retain precious capital needed to absorb future writedowns. For the four largest banks, the savings can be pretty huge. Here's how much each paid out in 2008:

Bank

2008 Dividends Paid

Bank of America (NYSE: BAC  )

$10.2 billion

JPMorgan Chase (NYSE: JPM  )

$5.9 billion

Citigroup (NYSE: C  )

$7.5 billion

Wells Fargo

$4.3 billion

Source: Capital IQ, a division of Standard & Poor’s.

The question everyone wants to know now is, "When will the dividends return?" For most of the major banks, the sad answer is likely "Not for a long, long time."

Why? Because while the table above is full of big numbers that can save the industry tens of billions of dollars, it's not nearly enough to plug the capital-draining hole banks need to get back to business. Citigroup can save $7.5 billion a year by eliminating dividends? Great! Now if it can find a few hundred billion more in savings, it might actually get a second shot at life. You get the idea.

Just a few weeks ago, I calculated the amount of capital banks would need just to get back to the historically average 6% tangible common equity ratio. Here's the amount each bank would need, assuming no further writedowns (which, of course, is a light year from reality):

Bank

Capital Needed to Achieve 6% TCE

Wells Fargo

$36 billion

Bank of America

$81 billion

JPMorgan Chase

$55 billion

Citigroup

$85 billion

Goldman Sachs

$10 billion

Morgan Stanley

$10 billion

So while, sure, cutting dividends is a smart and sensible approach to save capital, it isn't remotely enough to repair most banks' books in a meaningful way. Some banks will undoubtedly survive and prosper, but investors hoping for a quick rebirth of the once-hefty dividends banks paid back in the glory days shouldn't keep their hopes up. Bank dividends, for many years to come, are dead.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. BB&T and JPMorgan Chase are former Motley Fool Income Investor picks. The Motley Fool is investors writing for investors.


Read/Post Comments (1) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2009, at 3:20 PM, JibJabs wrote:

    Take a look at MTB- it's worth investigating. Dividend aristocrat holding strong.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 847244, ~/Articles/ArticleHandler.aspx, 12/20/2014 10:21:33 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement