Wachovia Joins the Club of Overpromising Financials

Wachovia (WB) joins the list of financials that promise one thing and deliver another as it reports a quarterly loss and tries to raise more cash, $7Billion worth, with a further offering. The 4th largest bank in America gave Wall Street a loss of $0.20/share vs. an expected $0.40/share profit.

Revenue was also weak at $7.89Billion vs. $7.98 expected. The numbers do in fact speak for themselves and when you've got the CEO coming out and saying that he's very disappointed in the results it's not a good sign for another financial name. But wait! Wasn't this the same CEO that months prior promised that things would be better, promised that the dividend is safe, promised a turnaround? In fact it is! But good things aren't meant to last and Wachovia's $0.64/share dividend (a yield of almost 9% at current valuations) wasn't meant to last either.

With losses, come jobs cuts and dividend slashes. Much like its bigger sibling in the banking world, Citigroup (C), Wachovia was forced, by this credit and mortgage mess, to cut its dividend by about 40% to $0.375/share. While still a respectable 5% yield, bringing it in-line with banking peers, the move comes as a blow to shareholders hoping for a turnaround in the near turn. Investors would hope in the best case that the high yield would correct itself based on a higher stock price, not on a dividend cut.

So what about the promises made not long ago of the dividend being safe? Can any Investor really know whether that was genuine or a 'buy some time' gesture? The fact remains that in the financial sector, throughout this credit crisis traders have seen many executives promise to hold the fort, then be unable to deliver. Most recently that was seen with Bear Stearns (BSC), where the executives relayed to Wall Street their 'solid as a rock' liquidity position, only to require a bailout days later by JP Morgan Chase (JPM) and the New York Federal Reserve.

Bright spots for Wachovia seem to be few and far between as the company took a further $2Billion in write-downs and set aside another $2.8Billion for future loan losses. One such bright spot for the capital position of the bank is its new stock offering. While traders punished the company, sending shares lower by almost 10%, selling almost $7Billion in stock (common and preferred) this has to be seen as a longer term positive. Shoring up the balance sheet is priority number 1 for Wachovia, and once that's taken care of the bank can begin its rebound, its stock climb based on solid earnings, and its return to higher dividend yields.

Disclosure: Author does not own any of the companies mentioned

Comments

[tattors]

it is interesting that Ken's new redlining of cities for lending has been ignored.. their new rating system, look into it.

[jimmy46]

Insiders have bought a lot of stock on the open market with their own money the last 5 months.

I wonder what they were thinking then and now.

[tattors]

Charlotte's banks will be pivotal to stabilizing the table of dominoes. Wachovia and BAC are so tied up with many southeastern, fratboy company connections. i bet the masters was a bit jittery...

[alvbr]

I read about a month ago that Wachovia had another year of writedowns and that it would have to raise capital to maintain itself. It also said that the dividend would be the last thing that would be altered. I own quite a bit of WB and am certainly disappointed that the dividend has been cut in their first strategy announcement of how their going to pull out of this mess. I bought WB at 58 and I can only hope that the dividend cut realizes an increase in stock price. signed, ALVBR

[WAKEUP]

Referring to tattors' comment, above: "Wachovia and BAC are so tied up with many southeastern, fratboy company connections." - - - If ever a true sentence was written, that's it. And those "fratboy company connections" spider-web out, so far, it's practically impossible to track them. The states of TEXAS, FLORIDA, and NEW YORK are particularly infested/infected by said connections. And the fratboy bunch owns so many real estate holding companies, around the enitre United States, that it is literally not funny.

[alphahokie]

I liked the comment that the board is backing ken. Of course they will, the board signed off on the purchase of Golden West.