Is BofA's Dividend Safe?

UBS (NYSE:UBS) analyst Matthew O'Connor doesn't think that Bank of America's (NYSE:BAC) dividend is going to be around much longer. In a recent note to clients, he wrote that the bank is facing further losses and will be under increasing pressure to raise its ratio of tangible common equity to assets from its current level of 3.2% (tangible common equity excludes goodwill and other intangible assets). BofA halved its dividend to $0.32 per share at the beginning of October -- are we set to see an early repeat performance?

BofA makes the "At Risk" list … again
In mid-October, I wrote an article in which I tried to identify banks that were most likely to cut their dividends. I proceeded with a simple screen that selected institutions in the top quintile of the industry in terms of their dividend yield and in the bottom quintile in terms of their Tier 1 Capital ratio. Bank of America was one of the banks that came up then, and it remains one of the 12 banks the screen produced when I ran it again yesterday. Those names include:

Reducing the dividend would be a rational act for BofA. Here's another argument: Merrill Lynch's (NYSE:MER) balance sheet will probably be consolidated with BofA's in the year-end accounts, which could put further pressure on the tangible common equity-to-assets ratio.

At this stage, dividend-focused investors are already shell-shocked by widespread cuts in bank dividends; besides, another halving of the quarterly dividend to $0.16 per share would still leave them earning a very respectable 4.2% annualized dividend yield. BofA shouldn't let excessive concern for this clientele prevent it from wielding the ax.

More Foolishness:

• The Best Stocks for the Year Ahead
• Don’t Even Think About Buying Bank Stocks