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.