TARP Is Bad for Dividend Investors

TARP allows the United States Department of the Treasury to purchase nonliquid, difficult to value assets from banks and other financial institutions. TARP also allow the Treasury to purchase whole loans and make direct equity investments in banks themselves. The targeted assets are securities backed by mortgages, sometimes described by the government, media, and others as “troubled” or “toxic” assets.

As of November 12, 2008, $290 billion of the first $350 billion allotment funding TARP has been allocated, primarily to the Capital Purchase Program: $250 billion for bank equity infusions, and $40 billion for an equity infusion into insurer American International Group.

The eight financial companies that were the first to have received TARP funds include:

Bank of America (BAC) (analysis)
Bank of New York Mellon Corp
Citigroup (C)
Goldman Sachs (GS)
JPMorgan Chase (JPM)
Morgan Stanley (MS)
State Street (STT)
Wells Fargo (WFC)

There were 44 other institutions that received TARP money, including USB, CMA, Northern Trust, Suntrust Banks (STI), KeyCorp (KEY), RF, BBT and others. Check out my analysis of USBank or my analysis of BB&T.

There is some talk that a TARP funding to banks essentially marks the end of their dividends.

"Restrictions on Dividends:

For as long as any Senior Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Senior Preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Senior Preferred), nor may the QFI repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Senior Preferred or common shares, unless (i) in the case of cumulative Senior Preferred all accrued and unpaid dividends for all past dividend periods on the Senior Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred the full dividend for the latest completed dividend period has been declared and paid in full.

Common dividends: The UST’s consent shall be required for any increase in common dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties." Source TARP Capital Purchase Program

What really showed me that TARP program is serious, is a recent statement from State Street last week, which announced that it wasn’t going to raise its dividends in compliance with the restrictions on dividend rate increases generally imposed on all participants in the U.S. Treasury's TARP Capital Purchase Program.

Before that State Street was the only dividend aristocrat which had consistently increased its dividends twice per year for almost 27 years in a row.

Traditionally, financial shares were one of the best yielding stocks in the marketplace. It seems that TARP essentially is bad news for any dividend investors, as it could result in further decreases to already lowered payments. The lesson to be learned for individual investors is to diversify across sectors, no matter how great the yields look.

Comments

[Vox Rationalis:]

I couldn't disagree more. It's not the TARP that's bad news for investors, it's the current economy and credit crisis. That State Street is using the TARP as its excuse for not raising the dividend is unsurprising, as it wants to maintain this "dividend aristocrat" reputation, but can't responsibly raise its dividend currently. There's nothing in what is quoted that indicates that the TARP means the end of dividends or dividend increases.

The first paragraph is quite similar to language seen in any preferred share prospectus; the company may not pay dividends on common stock unless it pays dividends on the preferred, and in the case of cumulative preferred unless it has paid all dividends owed to date.

The second paragraph says the Treasury must give consent for an increase in dividends. It doesn't sound at all that Treasury is putting undue restriction on dividend payments. Rather, it's making companies justify any dividend increases. Sounds logical to me.

I don't think any company that's successful enough in this environment to increase its dividend would face a Treasury "veto." I also don't think rational investors should expect any company to increase dividends these days. I'd rather see companies conserving cash or making smart acquisitions.

2008 Dec 31 10:58 AM

[CautiousInv...:]

The restrictions are not that unusual and perhaps should have gone further. Preferred share purchases under TARP are designed to improve bank liquidity to shoulder prospective losses and to provide the reserves necessary to make new loans..........not increasing dividends on existing preferred.

2008 Dec 31 11:39 AM

[Jamaican in...:]

Tarp in my mind is a life line to inestors with a long term outlook. OK perhaps today dividends may be reduced, but at least the company is still operating. Without TARP many of these organizations would have been forced to liquidate assets in order to satisfy creditors. Share holders values along with the probability of return to profitability would have been eliminated.
At least now shareholders have a prospect of dividends after the markets and the publicly traded companies they have invested in return to health. People should stop complaining and thank the US taxpayers for extending them a lifeline.

Jan 01 07:18 AM

[tipalia:]

interesting article, nothing really new by the way, and interesting comments also. The first sentence of JAMAICAN says it all I could not say it better myself. The second sentence of BS DETECTOR is partially right. It s not TARP that s by news for investors but greed because of a lack of regulations or even worse for not carrying out or enforcing the laws and the so few regulations in place. After all capitalism is made for the people in power and the rich people at the expense of the small investors and ,in last ressource, the taxpayers. I wonder how long it s going to last before we all raise to correct this situation. What happened to all those regulators that were in place during this carnage?
They might have resigned , big deal. What happened to those fat CEOs and board of executives that took advantage of the system? What a farce!

Jan 01 10:28 AM

[SteveB/Colo...:]

I think the title of this post is misleading. TARP is not bad for dividend investors as a whole; just for those who may hold the named financial stocks. I do agree that financial companies getting taxpayer aid should not be paying out those taxpayer dollars in the form of dividends. However, there is a vast universe of other companies that are paying good dividends. I particularly, with appropriate caution, like some of the energy companies.

Jan 01 11:05 AM

[tiredofallt...:]

We all have lost sight of the fact that IMHO there should be no taxpayer dollars involved in bailing out the greedy executives that have and will continue to fill their pockets at the expense of the taxpayer. They should have joined their Enron pals, if I worked for Enron I'd be expecting bail also, actually demanding it. We have been rewarding poor performance for sometime I think we have reached a new low. There is no bottom to the the hole we just dug and dividends are the least of our worries. SORRY! That's all,

Jan 02 12:24 PM

[Harry Tuttle:]

The article is very misleading. According to my calculations, the 8 banks have paid about $6.6 billion in dividends using the latest one declared. Everyone one of them, except BAC and WFC declared theirs after they received the TARP money. Bloomberg expects all of them to continue to pay dividends on common.

I am not even going to argue here on the logic of using taxpayers money to pay dividends on common stock which is borderline immoral.

Jan 14 03:32 PM