Bank of America May Have to Cut Dividend

Monday a bearish report from Citi Investment Research analyst Keith Horowitz sent Bank of America (BAC) shares 12% lower. The analyst announced that he was expecting further deterioration in Bank of America’s earnings, by cutting his projection for 2009 EPS to just $0.25/share. Given this information, the current quarterly dividend of $0.32/share might not be sustainable.

The analyst expects that Bank of America might have to cut its dividend again, which could happen as early as January 20, when the company reports its latest quarterly results.

As a long-term investor, I typically ignore articles like that, since I seriously doubt that anyone in the investment banking community has any sustainable forecasting abilities. Instead I try to focus on something that is not as volatile as stock prices – I focus on a diversified list of companies from a variety of industries that have consistently grown their dividends over time. Nobody knows where the market is going to be in one year, five years or a decade. If you are able however to pick the best dividend stocks for the long run, you will be able to generate enough dividend income from your portfolio that would cushion any unsustainably severe bear market declines.

In the case of Bank of America however, I won’t be surprised if the company does indeed cut its dividends as it faces further writedowns, frozen credit markets and TARP restrictions. Several once prominent banks have cut their dividends twice since early 2008. Investors who were hoping that the worst is over suffered significant declines in their passive incomes again and again. Some fresh examples of this include FITB, C and KEY.

In summary I believe that the issue of Bank of America’s dividends is not if it will cut, but when it will do so. Historically, one of the main reasons why companies have lost their dividend aristocrats status between 1989 and 2004 is dividend freezes or cuts related to merging two different companies or restructuring ongoing operations. In the case of BAC, the company has purchased Countrywide (CFC) and Merryl Lynch (MER), which definitely will pose huge integration issues. These integration issues might make the company’s business less transparent, which could also mean that BAC might not be a good value even at $11/share.

Comments

[RW4:]

It is my understanding that banks who accepted the
tarp money can not raise dividends .
If BAC cuts its dividend it will be locked in to the lower
dividend in the future
this will be a drag on the stock price people are willing
to pay for this lower dividend.
I would not bet on BAC cutting its dividend at this time

Jan 13 10:50 AM

[User 283977:]

I totally agree with the author. Their stock price is now below $11 per share and heading lower based on lower earnings. Their dividend yield is now over 11%. Given the projected earnings per share, that level of dividend is not supportable. They have to cut the dividend again.

Jan 13 11:12 AM

[BAC Retiree:]

The stock price & dividend are the report card for management. The stock price continues a downward drift while the dividend is fragile @ best. If the dividend is cut there must be a change in management. Lewis has gambled the the banks future on Countrywide & Merrill purchases. Lewis & his management team have their jobs & our stock price & dividend on the line!

Jan 13 11:17 AM

[secmaven:]

Why cut the dividend? Just dump some more worthless assets on the Fed in exchange for cash and party on!

Jan 14 11:25 AM

[kurt walter:]

All the BAC mistakes are coming home. Buying that dog Countrywide was stupid. BAC could have just waited and picked up the loan servicing dept. for next to nothing. But, no. They paying $50B for Merrill Lynch. Now that was really dumb, too. Overpaying for a brokerage firm that was going down. Could have picked up Merrill's pieces for next to nothing, too. How much longer with shareholders allow BAC management to remain in charge?

Jan 15 12:42 PM

[User 283977:]

Isn't this charming…
__________
January 16, 2009 - Bank of America (BAC) secured an extra $20B from the government. Most of the assets guaranteed by the government are from Merrill Lynch. In exchange, taxpayers will get $4B in preferred stock with a 8% yield and warrants, BAC will cut its dividend to $0.01, and the bank agreed to a mortgage modification program.
__________

There goes the dividend for the common share holders. BAC's CEO Lewis claims he didn't know how bad things were at Merrill prior to HIS merger deal. I believe complete knowledge of how things were at Merrill was part of his and the board's fiduciary responsibility. If you don't know, you don't sign. I suggest the stockholders vote this incompetent board out and let loose the hounds.

Jan 16 11:43 AM