U.S. Bank Dividend Yields Revisited

Last November, shortly after the Dow peaked at 14,280 points, I had a post on dividend yields of the largest banks in the country. At that time, I thought that, with many bank stocks yielding 6.0% or more, buying banks made some sense if the banks can keep their dividend payouts.

That was then and we all know what has happened since.

Big banks like Citibank (C) and Washington Mutual (WM) were hit hard by billions of write-downs tied to bad loans and literally had to be bailed out by foreign investors. At the same time, shares of these banks have plunged to multi-year lows with no end in sight (just when you thought it may be over, another shoe dropped). To have an idea on how bad things have been in the past year for big banks, take a look at the following plot, showing 1-year performances of the big-three: Citigroup, Bank of America (BAC), and J. P. Morgan Chase (JPM), against the Dow Jones U.S. Finance Index [^DJUSFN].

As banks eliminated thousands of jobs and sold billions of assets in order to shore up capital, they also cut back dividend distributions, which we can also see as an inevitable step taken in desperation (nobody wants to follow the fate of Bear Stearns (BSC)). So the above assumption - 'banks will hold their dividends' - no longer holds. However, the reduction in dividend payout doesn’t mean the yield will follow because share prices of many banks have fallen even further.

At the time when the subprime mortgage triggered financial crisis approaches its one-year anniversary,  I looked again at dividends of some of the largest banks in the country and to my surprise (well, I am not really surprised), I found that the yields have gone even higher, though many financials have cut their dividends by half (for example, Citigroup by 41%, WaMu by 72%). Of course, the increased yield is at the expense of the falling share price (see last column in the following table - 1-yr return - only two are positive).

Name	Yield (%)	Price	1-yr return (%)
Bank of America (BAC)	9.9	$25.88	-43.7
J. P. Morgan Chase (JPM)	4.1	$36.87	-21.8
Citigroup (C)	9.3	$18.55	-62.8
Wachovia (WB)	13.6	$16.92	-65.2
Wells Fargo (WFC)	5.1	$24.26	-27.9
Washington Mutual (WM)	21.56	$5.96	-85.4
U.S. Bancorp (USB)	5.7	$28.90	-9.1
Suntrust Banks (STI)	8.4	$35.94	-56.9
Capital One Financial (COF)	2.0	$39.52	-49.9
National City (NCC)	20.8	$4.99	-84.3
Regions Financial (RF)	13.8	$10.87	-65.1
BB&T (BBT)	7.7	$24.04	-38.4
PNC Financial Services (PNC)	4.5	$56.55	-18.4
State Street (STT)	1.4	$66.53	-1.4
Fifth Third Bancorp (FITB)	17.1	$10.05	-74.2
Keycorp (KEY)	13.5	$11.0	-66.7
Bank of New York Mellon (BK)	2.4	$40.10	1.0
Northern Trust (NTRS)	1.5	$70.79	12.2
Comerica (CMA)	9.5	$27.5	-51.1
Marshall & Ilsley (MI)	7.4	$16.83	-63.5
M&T Bank (MTB)	3.9	$72.19	-30.4
Union Bank of Calif. (UB)	4.9	$42.29	-26.5
Sovereign Bank (SOV)	2.0	$8.15	-62.0
Zions Bancorporation (ZION)	5.5	$31.09	-59.2
Huntington Bancshares (HBAN)	16.0	$5.80	-71.3

If you are an existing shareholder of any of those big banks (I own BAC), you obviously are not happy with how your stock has performed lately despite the high yield. If you are not an owner but are considering buying some bank stocks, the following financial ETFs can be alternatives to individual bank stocks:

• Financial Select Sector SPDR (XLF): 1-yr return -39.8%
• iShares Dow Jones US Financial Sector (IYF): 1-yr return -36.7%
• iShares Dow Jones US Financial Services (IYG): 1-yr return -42.4%
• iShares Dow Jones US Regional Banks (IAT): 1-yr return -42.4%
• PowerShares Dynamic Banking (PJB): 1-yr return -23.14%
• PowerShares Financial Preferred (PGF): 1-yr return -14.3%
• Ultra Financials ProShares (UYG): 1-yr return -65.6%
• Vanguard Financials ETF (VFH): 1-yr return -35.7%

Comments

[Dan Walker:]

Don't you think it prudent to wait until the shooting stops before you start picking up causalities?

2008 Jun 25 06:29 AM

[EE:]

Even after the war is over (2010-2011) their earning power will be greatly reduced, and after some unpredictable knee jerk up action they probably will stagnate for a long time under reform rules or practice. This is dead and dying $.

2008 Jun 25 06:46 AM

[EE:]

Then there's inflation at an admitted 4% but really double that and soon to be triple. My $ are in very small new firms having global footprints about to be profitable or there,and huge growth in their headlights. Talking resources, silver, molly, copper, oil, gas, gold, water, technology. They are all beaten down to wonderful levels. I figure sooner or later, folks will bale the big stocks and look for places with large earnings growth track records and potential even if they are less than $5 stocks now. Dividends in hyper inflation mean nothing unless it is a stock dividend in a fast growing firm that is under valued. I'd give examples but then some would suggest I'm hyping a poor stock I trying to unload. It is OTC time!

2008 Jun 25 07:18 AM

[nxs_uno:]

National City 20%? Why waste my time looking at his data if it is not correct? Good Lord, if he wants credibility, he needs to do some timely research into his facts. FITB just reduced their dividend for next Q. Lot of inaccuracy on this chart.

2008 Jun 25 07:42 AM

[hendi_alex:]

It may be worth noting that during this past year that both USB and BBT have increased yields not only via share price drop but also because of increasing their distribution level. USB raised its quarterly dividend from 40 cents to 42.5 cents per share for its January payment. BBT just announced a dividend increase from 46 cents to 47 cents per quarter, with its August first payment. For USB, the dividend represents a POR of 68.6% vs. Q1 earnings of 62 cents. For BBT the dividend represents a POR of 64% vs. Q1 earnings. IMO it is premature to say whether the earnings have stablilized yet for either of these banks, but there is a nice margin of safety supporting the current dividend levels. Further these companies, IMO, would not be raising distribution levels if they anticipated any likelihood of a dividend cut in the next year.

Note: I own shares of USB, BBT, and IAT, consider each to represent value at current prices and am accumulating in small incremental purchases.

2008 Jun 25 08:17 AM

[William Taylor:]

I have had a large investment in BAC for many years and recently bought more. I re invest all my dividends and the compounding is considerable. I figure if BAC goes to Hell then the whole country is doomed. I am in for life.

2008 Jun 25 09:22 AM

[sharksm:]

I've owned 6,000 shares of BAC for many years. By buying Countrywide, Ken Lewis has risked the credibility of what , in my opinion was the best bank. If he is able to make this buy a success and not cut the dividend, I will apologize, but if the dividend is cut, that s.o.b. should get thrown out on his ass, without a parachute!

2008 Jun 25 09:50 AM

[Dee Trooth:]

Evaluating the accuracy of the article reveals that the author's research was good and probably perfect at the time is was done. My update using, Yahoo Finaace, for, June 24, yields the following, 9 Div. Ylds. are the Same;10 Div. Ylds. are Higher; 6 Div. Ylds. are Lower. The lower yielders are, C, WB, WM, NCC, FITB, HBAN. My thanks to, The Sun and Seeking Alpha.

2008 Jun 25 09:56 AM

[hendi_alex:]

I like BAC and have been considering taking a position in this beaten down financial giant. Regardless of a dividend cut or not, would consider the stock to be a great long term investement. But shorter term, related to the timing of an entry, does anyone have a concern over the POR of the bank. Yahoo shows the payout ratio as 104%. The dividend is 64 cents per quarter, and earnings.com shows earning of Q2 2007 through Q1 2008 as $1.28, .82, .05, .23. I'm wondering how much of those earnings are related to write downs that may have nothing to do with short term cash flow. Am also thinking that much of those 100% writedowns will not really be 100% losses and in the next year or two will be added back to the books. Finally, I would think that as soon as write downs are history, the earnings number will immediate rebound to a decent level. Anyone have a guess as to the likelihood of a dividend cut for BAC. It would seem that shortly after such a cut may be the best time to initiate a postition in the bank.

2008 Jun 25 10:22 AM

[hendi_alex:]

Previous pseudonym was 'eyes wide opened' chosen for one post many months ago. Have updated pseudonym to match that used at investorvillage.com boards.

2008 Jun 25 10:40 AM

[kurt walter:]

I don't understand how upper management of most of these banks have a job. Many should have been fired months ago.

2008 Jun 25 12:37 PM

[Iknownothing:]

The CEO of BAC stated rather emphatically that they would not cut the dividend. And, based on this year and next year's earnings estimates there is no reason to disbelieve him.

Some write downs will be write UPS next year.

And, in answer to a previous poster.... we always picked up casualties (wounded) while bullets were still flying.

2008 Jun 25 12:43 PM

[winslow:]

All of these institutions have commited a crime. The government needs to take a strong stance that nothing like this will ever happen again. Alas, we have a present administration that considers this "the normal business cycle". These financial firms are the conerstone of the US economy and we let them take all the candy in the candystore.

2008 Jun 25 04:19 PM

[bill d:]

Winslow - You are absolutely correct - make sure you vote for Obama and he will make all your dreams come true except some of us may consider them nightmares.
Oh yeah - gov't control is the answer for everything.

2008 Jun 26 01:03 AM

[sunx:]

An excfllent article in the July + August MOTHER JONES Magazine entitled "this was no accident-Wwo wrecked the economy- and why they work for John McCain

The article basically puts the blame at Phil Gramm's feet. It says that some laws he helped get passed in 1999. It was" a historic banking billthat decimated Depression-era firewalls between commercial banks , investment banks, insurance companies,and securities firms-setting off a wave of merger mania.
In Dec. 2000, he helped to get a bill passed called theCommodity Futures Modernization Act. It was written with the help of financial industry lobbiests. For starters, the legislation contained a provision-lobbied for by Enron, a generous contributor to Gramm-that exempted energy trading from regulatory oversight. I believe it also opened the door for all those Credit Defaukt Swaps that ultimately helped everything get so out of controll.

We will feel the results of this deregulation for years into the future. I've tried to give a summary of the article, but I'm afraid I haven't done it justice. Please chekc out the article for greater detail.

2008 Jun 26 11:03 PM

[1worldcurrency:]

Anonymous writer said buy banks last November. And they still publish this drivel?

2008 Jun 27 02:29 AM

[fireball:]

i owned about 8500 shares of regions at the time of the amsouth buyout. luckily circumstances caused me to sell off 7000 shares to buy bhp,ngs,trma,silxf, and io. also to pay off a new home purchase. i sold the old home right after the first wave of housing trouble. i guess an angel was watching over my shoulder or lady luck was smiling. i wish i could say i had that much savvy but i was lucky. my remaining shares of regions are reinvesting.

2008 Jun 27 12:09 PM

[fireball:]

winslow, obama? government? not that hillary or john are any better. looks like the choices were larry moe and curly, or the facist the socialist or the communist. the gov has done well with: our currency? socialist security? education? infrastructure? defense? healthcare?...... maybe if they were chained as intended by our constitution and concentrated on what tiny amounts of legal authority the fedaralis are allowed we would not be in this mess. please do not whine about an organic constitution. it was written in the simple plain language of the day for all to understand.

2008 Jun 27 04:35 PM

[AlphaHunter:]

I think finanical sector is still not out of woods even after 340 billion dollar worth of writeoffs and around a trillion dollar wipped out of the market capitalization of this sector. There are number of reasons for that
1) Securtization cycle is completely broken off, most of the big investment bank/brokers earned a third of the earnings from this. And i don't see this returning back anytime soon.
2) Regional banks still have to recognize all the losses on the loans that are still on their balance sheets and not yet securitized.
3) All the recently raised capital(convertibles/p... Debt) will have a highly dilutive impact on the number of shares outstanding 3-5 years down the road.
4)Banks/Brokerage houses has yet to recognize the losses/reduced earnings due to general economic slowdown
So any recovery before 2010 is highly unlikely for financial sector.
i look forward to the Comments/suggestions from fellow alpha seekers.

2008 Jul 06 01:02 PM

[sunx:]

AlphaHunter, You are seeing clearly!
Thanks for your comments.

2008 Jul 14 02:49 PM