Business

Will BofA be next to cut dividend?

As Bank of America Corp. faces rising defaults and falling earnings, analysts are asking whether the Charlotte bank will have to cut its payouts to shareholders. After all, more companies have been cutting dividends, and the financial industry is especially affected.

Wachovia Corp. already cut its dividends by 41 percent this year, and some analysts have said it may slash them yet again.

“It's become socially acceptable – not to mention necessary – for banks to cut their dividends these days,” observed James Early, a senior analyst at The Motley Fool investment Web site.

Dividends are per-share payments a company gives shareholders from its corporate earnings, usually each quarter. Companies don't have to pay them, but they're a good incentive for encouraging people to buy a stock.

Forty-two banks and thrifts have cut their dividends this year, including big names like Citigroup Inc. and Washington Mutual Inc., according to data compiled by SNL Financial. That's well on the way to surpassing last year's tally, when 55 banks cut dividends. And banks aren't the only ones slashing them: Thirteen companies on the S&P 500 have cut dividends and another five have suspended them this year. In the first half of last year, two companies cut dividends and two suspended them.

Cutting dividend payouts is a surefire way to anger shareholders, but the Federal Reserve and market conditions are pressuring banks to shore up capital. The two Charlotte banks have also had to raise capital this year by issuing new securities, which can dilute the value of shareholders' holdings because profits are spread among more shares.

In the first quarter, Bank of America earned 23 cents per share and paid out 64 cents. Wachovia lost 36 cents per share; it announced in April it would cut its dividend to 37.5 cents from 64 cents.)

“The market is definitely pricing a dividend cut for (Wachovia and Bank of America),” Early said. “And the market tends to be pretty smart.”

Bank of America

Analysts at Deutsche Bank said recently that Bank of America, as well as Citigroup and Goldman Sachs Group Inc., may announce “dramatic” dividend cuts. It predicted that Bank of America would cut its dividend from 64 cents to 38 cents – right in line with Wachovia's reduction.

Last month, Merrill Lynch analyst Edward Najarian forecasted a 30 percent dividend cut in the third quarter for Bank of America. Jaime Peters at Morningstar said in a note Monday that, if Bank of America buys Countrywide Financial Corp. this summer as expected, there's an 80 percent chance that the bank will cut its dividend and raise additional capital in order to finance the deal. Peters estimates there are between $5billion and $18 billion of losses hidden on the balance sheet of Countrywide, the troubled California-based mortgage lender Bank of America expects to acquire this summer.

In January, Peters estimated that Bank of America needs to earn $3 billion in each quarter this year to meet dividends payment without eating into the capital base. In the first quarter, earnings were $1.2 billion, down from $5.3 billion the year before.

Bank of America chief executive Ken Lewis has said the bank would consider cutting the payout if the economy worsens dramatically.

“But from what we see and what we project, we see no reason to cut the dividend,” he said last week, speaking on a conference call with analysts.

Lewis also emphasized that earnings had fallen behind dividend payments because the bank was building up reserves for potential losses. “That's a little different than a cash loss or not meeting it with all your cash sources,” he said. Bank of America put $3.3billion of pre-tax earnings in reserve in the first quarter.

In a January earnings call, Lewis noted how Bank of America has raised its dividend for 30 years.

Dick Bove, an analyst for Ladenburg Thalmann, and others agree with Lewis' defense, also citing Bank of America's respectable capital levels and increasing interest income and deposits.

If Bank of America does cut its dividend, Peters said, it should be able to restore it soon after the credit crunch is over.

Wachovia

Some analysts expect a second whack at Wachovia's dividend as the bank attempts a turnaround after jettisoning its CEO. Ken Thompson's dismissal last week, Early said, “wouldn't have been likely had the company seen a bunch of good news coming down the pike.”

Kevin Fitzsimmons of Sandler O'Neill said in a note released after Thompson's ousting that cutting the dividend again could be easier with a new CEO on board. Gary Townsend, a former analyst who has launched a Maryland-based investment firm, correctly predicted as early as February that Wachovia would cut its dividend, even as the bank was saying otherwise. Tuesday, he said there was a “reasonable probability” that Wachovia would cut it again.

Wachovia's dividend had risen steadily and significantly since 2001, when the bank halved it to 24 cents after watching profits fall 97 percent the year before, largely because it closed down a troubled subprime lender called The Money Store.

Wachovia and Bank of America said Tuesday they do not comment on analysts' speculations.

As Bank of America Corp. faces rising defaults and falling earnings, analysts are asking whether the Charlotte bank will have to cut its payouts to shareholders. After all, more companies have been cutting dividends, and the financial industry is especially affected.

Wachovia Corp. already cut its dividends by 41 percent this year, and some analysts have said it may slash them yet again.

“It's become socially acceptable – not to mention necessary – for banks to cut their dividends these days,” observed James Early, a senior analyst at The Motley Fool investment Web site.

Dividends are per-share payments a company gives shareholders from its corporate earnings, usually each quarter. Companies don't have to pay them, but they're a good incentive for encouraging people to buy a stock.

Forty-two banks and thrifts have cut their dividends this year, including big names like Citigroup Inc. and Washington Mutual Inc., according to data compiled by SNL Financial. That's well on the way to surpassing last year's tally, when 55 banks cut dividends. And banks aren't the only ones slashing them: Thirteen companies on the S&P 500 have cut dividends and another five have suspended them this year. In the first half of last year, two companies cut dividends and two suspended them.

Cutting dividend payouts is a surefire way to anger shareholders, but the Federal Reserve and market conditions are pressuring banks to shore up capital. The two Charlotte banks have also had to raise capital this year by issuing new securities, which can dilute the value of shareholders' holdings because profits are spread among more shares.

In the first quarter, Bank of America earned 23 cents per share and paid out 64 cents. Wachovia lost 36 cents per share; it announced in April it would cut its dividend to 37.5 cents from 64 cents.)

“The market is definitely pricing a dividend cut for (Wachovia and Bank of America),” Early said. “And the market tends to be pretty smart.”

Bank of America

Analysts at Deutsche Bank said recently that Bank of America, as well as Citigroup and Goldman Sachs Group Inc., may announce “dramatic” dividend cuts. It predicted that Bank of America would cut its dividend from 64 cents to 38 cents – right in line with Wachovia's reduction.

Last month, Merrill Lynch analyst Edward Najarian forecasted a 30 percent dividend cut in the third quarter for Bank of America. Jaime Peters at Morningstar said in a note Monday that, if Bank of America buys Countrywide Financial Corp. this summer as expected, there's an 80 percent chance that the bank will cut its dividend and raise additional capital in order to finance the deal. Peters estimates there are between $5billion and $18 billion of losses hidden on the balance sheet of Countrywide, the troubled California-based mortgage lender Bank of America expects to acquire this summer.

In January, Peters estimated that Bank of America needs to earn $3 billion in each quarter this year to meet dividends payment without eating into the capital base. In the first quarter, earnings were $1.2 billion, down from $5.3 billion the year before.

Bank of America chief executive Ken Lewis has said the bank would consider cutting the payout if the economy worsens dramatically.

“But from what we see and what we project, we see no reason to cut the dividend,” he said last week, speaking on a conference call with analysts.

Lewis also emphasized that earnings had fallen behind dividend payments because the bank was building up reserves for potential losses. “That's a little different than a cash loss or not meeting it with all your cash sources,” he said. Bank of America put $3.3billion of pre-tax earnings in reserve in the first quarter.

In a January earnings call, Lewis noted how Bank of America has raised its dividend for 30 years.

Dick Bove, an analyst for Ladenburg Thalmann, and others agree with Lewis' defense, also citing Bank of America's respectable capital levels and increasing interest income and deposits.

If Bank of America does cut its dividend, Peters said, it should be able to restore it soon after the credit crunch is over.

Wachovia

Some analysts expect a second whack at Wachovia's dividend as the bank attempts a turnaround after jettisoning its CEO. Ken Thompson's dismissal last week, Early said, “wouldn't have been likely had the company seen a bunch of good news coming down the pike.”

Kevin Fitzsimmons of Sandler O'Neill said in a note released after Thompson's ousting that cutting the dividend again could be easier with a new CEO on board. Gary Townsend, a former analyst who has launched a Maryland-based investment firm, correctly predicted as early as February that Wachovia would cut its dividend, even as the bank was saying otherwise. Tuesday, he said there was a “reasonable probability” that Wachovia would cut it again.

Wachovia's dividend had risen steadily and significantly since 2001, when the bank halved it to 24 cents after watching profits fall 97 percent the year before, largely because it closed down a troubled subprime lender called The Money Store.

Wachovia and Bank of America said Tuesday they do not comment on analysts' speculations.

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