Which Bank Will Cut Its Dividend Next?http://www.fool.com/investing/dividends-income/2008/10/13/which-bank-will-cuts-its-dividend-next.aspx Alex Dumortier, CFA
October 13, 2008
When Bank of America (NYSE: BAC ) announced last Monday that it would halve its dividend, the market wasn't impressed. But B of A is just the most prominent name among a long list of financials doing the same thing. In the third quarter, with dividends hitting historic lows, financials accounted for over 90% of the $22.5 billion in dividend cuts, according to Standard & Poor's. What's a dividend-focused investor to do?
If you've suffered a cut on some of the bank stocks you own, that's painful. If that hasn't happened to you yet, you should know that it soon might. For banks, bending over backward to maintain their dividends defies rationality in the current environment -- in the long run, that attitude is difficult to sustain.
The hardest cut may be necessary
By my rough estimate (which assumes their share counts and dividends remain constant with respect to the last quarter), the five largest banks alone are set to pay out nearly $25 billion in dividends over the next 12 months. Those banks are JPMorgan Chase (NYSE: JPM ) , Bank of America, Citigroup, Wells Fargo (NYSE: WFC ) , and US Bancorp (NYSE: USB ) .
(In case you're wondering, that estimate takes into account Bank of America's announced dividend cut.)
Raising capital from Peter to pay Paul's dividend
What many banks are effectively doing is funding dividend payouts to shareholders with dilutive share offerings or other expensive forms of equity financing (such as higher-yielding preferred shares). That approach to capital management just doesn't make sense, as it destroys shareholder value.
Sorting through the usual suspects
The screen produced 13 names; the following table displays the five largest by market value -- note that they happen to be among the top 30 banks in the U.S. by the same measure, with two in the top 10.