Surprise: Bank of America Cuts Dividend By 50%

Bank of America (BAC) finally cut their dividend by 50% which saves about $1.4 billion per quarter. I've talked a lot about whether or not BAC will cut its dividend and now they finally have. The credit crisis has obviously gotten to a point that is much worse than anyone had imagined. BAC recently purchased Merril Lynch (MER) and it is also paying out a lot of money for bad loans, lawsuits, etc. related to the Countrywide Financial acquisition. These needs, along with the fact that the credit crunch got worse than expected with many casualties, were probably paramount in the decision to cut the dividend. My initial bet that BAC would not cut the dividend as one of my reasons for purchase, was wrong.

Having a firm that you own cut its dividend is probably the worst thing that can happen to a dividend investor. In this case, because BAC was such a small part of my portfolio (about 3%) this dividend cut barely affected my income from investments. Another factor that is really offsetting its affect is the appreciation of the U.S. dollar recently versus the Loonie. The dividends that all of my U.S. holdings are paying me have become more valuable over the past few weeks. I will update my income from investments very soon.

I am holding on to my BAC shares despite the dividend cut for several reasons:

• Now would be a terrible time to sell BAC, and if I were to sell I'd sell into strength.
• Because of all of the failures and consolidations in the U.S. financial industry due to the credit crisis, Bank of America looks like it will turn out to be bigger and have more market share, talent, and influence in the global market which looks positive for the company going forward.
• Bank of America is currently the bulk of my exposure to financials outside of Canada, which I intend to maintain exposure to.
• I believe the company still values dividend growth and should begin to re-grow the dividend after credit and economic conditions stabilize.

Disclosure: The author owns BAC.

Comments

[User 275334:]

Again FIRE THE BASTARD!! He said in NO UNCERTAIN TERMS " The DIVIDEND IS SAFE AND IT WILL NOT BE CUT" just a couple months ago! Then His EGO GOT IN THE WAY and he bought bankrupt Countrywide, almost Bankrupt Merrill !! FIRE HIM!!!

2008 Oct 07 10:06 AM

[Roger C. Wren:]

If these purchases work out over the next three or four years Lewis will be thought of as a brainiac who bought while there was blood in the streets and made a bundle for BAC. If they do not he will probably be appearing before a hostile Congress.

2008 Oct 07 11:15 AM

[Dai:]

I think that a dividends cut is the best way to go. I say this because perhaps Bank of America has found a better way to use the money long term. If any company is paying out money to its investors it means that they are foregoing investment (or do not have investments that will payback) money in order to make their shareholders happy. In the long run this is not the right thing.

2008 Oct 07 12:59 PM

[moneygardener:]

As much as I like companies to 'pay daddy', these are unprecedented times and i belive that the CFC and MER acquisitions will pay dividends in the future.

2008 Oct 07 05:42 PM

[notsosmart:]

did lewis cut his pay 50%? no really?

2008 Oct 08 05:07 PM