Will BofA Cut Its Dividend?

First of all, let me apologize for the hiatus. Let's just say that there were things that required my full time attention. Several extraordinary developments have taken place in past few days. In this post, I am going to discuss the purchase of Merrill Lynch (MER) by Bank of America (BAC) and its fall out on the BAC shareholders.

Gobbling up Merrill Lynch in a time when hell froze over on Wall Street just goes to show the confidence Ken Lewis has in his company. Merrill Lynch will prove strategically very important for Bank of America. Ken Lewis has dabbled with investment banking several times without success. After having his share of fun in investment banking, Ken Lewis decided to wash his hands of it. Merrill Lynch gives him the best chance ever to succeed in that area. This chance however comes with a price tag of 50B dollars. People everywhere are saying that Ken paid too much for MER when he could have picked MER for less than half that money in a day or two. Only time will tell how this deal will work for BAC but in short term, this deal may have grave consequences for the shareholders who rely on the income generated by the dividends.

This deal is an all share deal. This means that BAC will have to issue a lot of shares, namely 33% of current outstanding shares to close the deal. This means that the dividend liability will increase by 33%. The payout ratio for BAC is over 100% as it is and is going to increase 33%. With capital ratio, dwindling BAC cannot afford to pay out money in dividends that is considerably more than the earnings. Unless the company significantly increases its significantly in next few quarters, it’s only a matter of time when BAC cuts the dividend.

Disclosure: None

Comments

[venividivici:]

I am at a total loss to understand how Merrill Lynch will make any money in this brave new world. All the old BS money making games have either been sent to the dustbin or are now hugely reduced and he is going to pay the equivalent of $50 billion in BAC shares. How will this not be hugely dilutive to the company's earnings per share? Can someone please enlighten me.

2008 Sep 22 07:48 AM

[JoeChase:]

Improve their significantly significantly?? "Unless the company significantly increases its significantly in next few quarters"
You mean earnings? If so you should talk about how much their earnings will increase because of MER

2008 Sep 22 08:03 AM

[JoeChase:]

Improve their significantly significantly?? "Unless the company significantly increases its significantly in next few quarters"
You mean earnings? If so you should talk about how much their earnings will increase because of MER

2008 Sep 22 08:03 AM

[JoeChase:]

Veni Vidi Vici:
It will dilute per share earnings in the short run because Merrill has been losing money. In a year or two the EPS should be back around where it was because Merrill will earn money. BAC was projected to earn about $3 per share in 2009. There will be about 1.3B new BAC shares for the MER acquisition, (50B/37.48=1.3B), to keep EPS the same they will have to have total net income of 17.7B next year instead of 13.7B

2008 Sep 22 08:11 AM

[RichardS:]

"the new company should be able to generate 6% to 9% annual growth, and 10% growth in eps, 'on the other side' of the curent financial crisis., Lewis told Barron's"

This move is going to reduce BAC dependence on consumer/small business banking by adding future revenue streams from global wealth mgt and global corporate and investment banking.

Long term I think its a good move. Short term I agree that they will need to reduce the dividend given increase in shares outstanding.

2008 Sep 22 08:48 AM

[Bid-Ask1918:]

Look closer at the BAC deal. The MER deal brings a stake in Blackrock. This stake can be sold for anywhere between 10 and 13 billion dollars. Also BAC has their China stake that could be sold. Proceeds from both could be used to buy shares already issued and outstanding which does not increase the dividend liability. Earnings of BAC should also benefit from the recently announced bailout plan especially where Countrywide is concerned. The prudent man always sells the expensive and buys the cheap. Lewis seems to be a prudent man.

2008 Sep 22 08:52 AM

[Urbane Gori...:]

I would not buy BAC expecting the dividend to continue... In fact, the BofA business model seems to exist on sucking as much blood from their depositors and investors as possible. A real vampire operation.

My Credit Card was bought by BofA.. Boy what a bunch of scam artists and liars. I'm waiting to see who buys Wamu where I bank. If it's BofA, I'm running like a scared rabbit!

jegan

2008 Sep 22 01:48 PM

[vikas:]

The article has the following
Improve their significantly significantly?? "Unless the company significantly increases its significantly in next few quarters"

This is an error in editing by seeking alpha. The article is also available at
valueinvestmentblog.co.../

2008 Sep 22 02:29 PM

[bill d:]

What are you - the new NYKA ?
So nice to hear from people who never make a mistake.
Thanks for your enlightening contribution.

2008 Oct 02 04:11 PM