US Bancorp Cuts Dividend by 88%

It’s official – the board of directors cut the quarterly dividends by 88% to $0.05/share. This follows recent dividend cuts from JP Morgan (JPM) and PNC Financial (PNC), which cut their quarterly dividends by 87% and 85% respectively in an effort to conserve cash.

US Bancorp CEO said the following: "The decision to reduce our quarterly dividend was thoughtfully considered and very difficult, given the importance of the dividend to our shareholders. It was, however, the right decision, as our industry continues to confront uncertainty in the financial markets and a weakening economy. It is important for our shareholders to know that we are not reducing the dividend and preserving capital from a position of weakness, but from a position of strength and a desire to continue to invest in and expand our business. We are benefiting from a flight to quality as we continue to lend, acquire deposits and grow our fee-based businesses. In addition, we are investing in our franchise and employees, positively impacting our customers and the communities we serve. A strong capital position is essential to manage, grow and prosper in this challenging environment. Our company's capital position is solid, evidenced by a Tier 1 capital ratio of 10.6 percent at December 31, 2008.”

The company also announced that it would be reinstating its dividends whenever the economic picture stabilizes. This decision would save the Minneapolis based bank approximately $2.6 billion dollars annually.

The move wasn’t surprising since USB couldn’t cover its previous payment of $0.425 for the last two quarters. In November, USB received $6.6 billion from TARP. In December the bank failed to increase its dividend to shareholders for the first time 37 years. The latest move lead to US Bancorp losing its dividend aristocrat status. In my analysis of US Bancorp back in April 2008 i warned that the high dividend payout ratio is a warning sign that dividend growth might be less spectacular in the future.

I don’t own any USB stock but if I did, I would be a seller on Wendesday morning's open. One could never tell if the worst for financials is over. US Banks have collectively shown that if they find a way to avoid sharing profits with their shareholders, they would cut or suspend dividend payments. Once again the lesson learned for investors is to never chase high yielding stocks which do not have a good enough coverage of their current dividend payment. In addition to that, concentrating the majority of one’s dividend income portfolio in one or two sectors such as financials or utilities is a recipe for disaster.

Of all the major banks, Wells Fargo (WFC) is also rumored to be the next to cut its dividends. It fits the profile of a dividend cutter perfectly - it has already received billions in TARP money.

Disclosure: None

Comments

[User 342869:]

Since when does a company's earnings translate into cash available for a dividend? These SA author/analysts appear to be really ignorant of this fact. Most of USB's 4th quarter earnings shortfall was due to a non-cash charge.

Mar 04 10:33 AM

[tk77mann:]

This dividend cut is a slap in the face to investors who believed USB management knew what they were doing and knew what assets they had in their books. While it "saves them $2.6 billion annually," it also costs their shareholders $2.6 billion annually.

I sold my USB this morning. My trust in financial stocks is down even more than I ever thought possible. There are a lot of other companies with transparent financial statements paying a decent dividend with cash flows that cover the dividends.

Mar 04 12:01 PM

[Dividend Gr...:]

Apparently the "non cash item" wasn't a non cash item that's not important, as their dividend was sacrificed. You should definitely understand how accrual accounting works.. Some "non cash items" might not affect cash flow but will lower the expectations of profit from assets.. EPS is cash which might not be received right away, but ultimately you want positive EPS and hopefully you won't have to wait for years in order to collect revenues.

Let's look at 4Q press release on earnings:


"Significant items in the fourth quarter of 2008 results included $253 million of securities losses, primarily impairment charges on securities related to structured investment vehicles. In addition, the Company increased the allowance for credit losses by recording $635 million of provision for credit losses in excess of net charge-offs. In total, significant items reduced earnings per diluted common share by approximately $.34. In the third quarter of 2008, the Company's results were affected by similar items, including net securities impairments of $411 million, market valuation losses related to the bankruptcy of an investment banking firm and a $250 million provision for credit losses in excess of net charge-offs. In total, those items reduced third quarter of 2008 earnings per diluted common share by approximately $.28. "

I see a deterioration in the "special items" from 0.28 to 0.34 in 3Q 08 vs 4Q 08. Yet EPS was 0.15 and 0.32 for 4Q and 3Q respectively.

On Mar 04 10:33 AM User 342869 wrote:

> Since when does a company's earnings translate into cash available
> for a dividend? These SA author/analysts appear to be really ignorant
> of this fact. Most of USB's 4th quarter earnings shortfall was due
> to a non-cash charge.

Mar 06 05:08 AM

[k45:]

My ex wife knew the top management in USB. She had high regard for Grundhoffer (the now retired CEO) but a very low opinion of Richard Davis who is now at the helm. I've been leary since Davis took over, wondering how he would run things down.

"It is important for our shareholders to know that we are not reducing the dividend and preserving capital from a position of weakness, but from a position of strength and a desire to continue to invest in and expand our business." Yeah right. Typical Richard Davis smoke to cover up the problems he has brought. The cards are falling down.

Mar 06 07:14 AM