3 Types of Financial Dividends, Part 3: No Dividend

Tough times have forced these financials to eliminate dividends.

Jan 12, 2014 at 7:30PM

In the first part of this series, I looked at financial stocks suitable for an income investor. In Part 2, I looked at the micro-dividends paid by some more beaten-down financials. But there's another category of financials that pay no dividend, making them unattractive for income investors. However, these stocks still have potential for capital appreciation and could reinstate a dividend in the future.

U.K. banks
The U.K. is a hub of financial activity and contains two major banks that still pay no dividend. Royal Bank of Scotland Group (NYSE:RBS) still looks a long way from paying common shareholders anything, as it remains 81% owned by the government. The future of the bank remains uncertain, and the issue remains a political football since the bank was taken over during the financial crisis.

RBS still trades below tangible book value as investors price in a discount because of the large government ownership stake. Over the next few years, RBS is expected to sell its Citizens division to raise additional capital. However, privatization looks farther off, as U.K. Treasury Chief George Osborne noted that it's unlikely to occur before the 2015 elections. As a result, RBS is unlikely to pay dividends for years, forcing investors to rely on capital appreciation for any gains.

While Lloyds Banking Group (NYSE:LYG) also got a U.K. government bailout, the government has been reducing its stake, which is now down to 33%. The bank is working on selling non-core assets before it asks regulators to approve a dividend reinstatement. With the government's ownership stake in Lloyds significantly lower than the RBS stake, there is a light at the end of the tunnel for this bank.

Although it's not an income investment today, Lloyds could be in the future, as the bank has noted its intention to pay out 70% of earnings as dividends. A reinstatement of the Lloyds dividend could be a major catalyst for the stock, as it would attract dividend-only funds and a very limited number of income investors.

German banks
The financial crisis has taken its toll on Commerzbank AG (NASDAQOTH:CRZBY), which has seen shares fall more than 90% from their pre-recession peak. Exposure to the mortgage and shipping markets combined to push Commerzbank into 25% government ownership. The stake is now down to 17%, a level at which the government can no longer veto management decisions, but this and capital concerns still keep the bank from paying a dividend.

With the government stake down to 17%, favorable market conditions could allow the government to eliminate the stake by selling it to another institution or selling the shares on the market. However, I would expect Commerzbank to put off reinstating a dividend at least until the stress test results from the European Central Bank are released. In March 2013, Commerzbank CEO Martin Blessing noted that dividends after 2013 were a possibility, highlighting the bank's intention to reinstate a dividend as soon as it's financially feasible.

The banking system in Greece required billions in recapitalization, as loans soured along with the economy. At National Bank of Greece (NYSE:NBG), dividends were suspended years ago and remain suspended today as the bank sells off assets to raise capital. Economic conditions remain uncertain, and the European Central Bank's stress tests are coming up.

Even National Bank of Greece Preferred Stock Series A (NYSE:NBG-A) has seen its dividend suspended as the bank tries to preserve capital. It will probably be years before this bank pays an income-level dividend because of all the challenges and uncertainties relating to the Greek economy. For speculation purposes, I am bullish on this bank but would note that it's only suitable investors who can afford to lose their investment in the event of poor stress test results or a worsening of the Greek economy.

No dividend
These banks are all in unique situations that prevent them from paying dividends. Some, like Lloyds Banking Group and Commerzbank, could begin paying a dividend within the next few years. However, all the banks mentioned here are capital appreciation investments at this time and carry higher risks when compared with their healthier financial peers.

Some of the greatest recoveries come from when companies have suspended their dividends and shares are trading at their lows. These situations often carry the greatest risks, so investors should always make sure to do their own research and invest only what they can afford to lose.

The bank with dividends, stability, and growth
Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

Alexander MacLennan owns shares of Commerzbank AG (German listed) and National Bank of Greece December 2017 warrants. He also has options on National Bank of Greece. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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