Tuesday, September 30, 2008

Which Bank will be next? Follow the dividend cuts

I received a lot of e-mails from subscribers on Monday after the collapse of Wachovia, asking me which bank I believe will be the next to fail. Most investors are afraid they will wake up next Monday morning with a worthless financial stock, whose deposits have been sold to another institution.

I think that the answer to that question is to simply follow the money. Most of the financial institutions which ended up with stock prices rapidly approaching gravity were in terrible financial condition and as a result their management scrambled to find ways to fund the ongoing operations and cut expenses to the bone. One of the most difficult decisions that most boards had to make was cut the dividends.

Typically most US companies pride themselves for having an uninterrupted record of paying dividends or even better, a long period of uninterrupted increases in their annual payments to stockholders. Thus cutting the dividends to shareholders is usually one of the last resorts to action.

If you look at the records of the financial institutions in the S&P 500 that cut their payments this year, you will find an interesting pattern of dividend cuts and then massive failures. Examples like this include FNM, FRE, LEH, WB and WM. In most cases the dividend cut gave shareholders a warning signal at least several months before the failure. Just for the record this strategy isn’t foolproof so don’t bet the bank on it – there will surely be financials which cut their dividends and most probably prosper in the coming good times. It would be interesting to note how the companies in this list perform over the next few years.



Name

Dividend Cut

Type

Symbol

New

Old

Cut

Sector

Notes

Ambac Financial Group

JAN

DECREASE

ABK

0.28

0.84

-66.67%

Financials

 

Citigroup Inc

JAN

DECREASE

C

1.28

2.16

-40.74%

Financials

 

First Horizon Natl

JAN

DECREASE

FHN

0.8

1.8

-55.56%

Financials

 

MBIA Inc

JAN

DECREASE

MBI

0.52

1.36

-61.76%

Financials

 

Natl City Corp

JAN

DECREASE

NCC

0.84

1.64

-48.78%

Financials

 

Sovereign Bancorp

JAN

SUSPENSION

SOV

0

0.32

-100%

Financials

 

MBIA Inc

FEB

SUSPENSION

MBI

0

0.52

-100%

Financials

 

Ambac Financial Group

MAR

DECREASE

ABK

0.04

0.28

-85.71%

Financials

 

CIT Group

APR

DECREASE

CIT

0.4

1

-60%

Financials

 

Huntington Bancshares

APR

DECREASE

HBAN

0.53

1.06

-50%

Financials

 

Natl City Corp

APR

DECREASE

NCC

0.04

0.84

-95.24%

Financials

 

Wachovia Corp

APR

DECREASE

WB

1.5

2.56

-41.41%

Financials

Failed

Washington Mutual

APR

DECREASE

WM

0.04

0.6

-93.33%

Financials

Failed

Federal Natl Mtge

MAY

DECREASE

FNM

1

1.4

-28.57%

Financials

Failed

Fifth Third Bancorp

JUN

DECREASE

FITB

0.6

1.76

-65.91%

Financials

 

KeyCorp

JUN

DECREASE

KEY

0.75

1.5

-50%

Financials

 

Regions Financial

JUL

DECREASE

RF

0.4

1.52

-73.68%

Financials

 

Wachovia Corp

JUL

DECREASE

WB

0.2

1.5

-86.67%

Financials

 

First Horizon Natl

JUL

SUSPENSION

FHN

0

0.8

-100%

Financials

 

Federal Home Loan

AUG

DECREASE

FRE

0.2

1

-80%

Financials

Failed

Amer Intl Group

SEP

SUSPENSION

AIG

0

0.88

-100%

Financials

 

Comerica Inc

SEP

DECREASE

CMA

1.32

2.64

-50%

Financials

 

Federal Home Loan

SEP

SUSPENSION

FRE

0

1

-100%

Financials

 

Federal Natl Mtge

SEP

SUSPENSION

FNM

0

0.2

-100%

Financials

 

Lehman Br Holdings

SEP

SUSPENSION

LEH

0.05

0.68

-92.65%

Financials

Failed

Lehman Br Holdings

SEP

DECREASE

LEH

0

0.05

-100%

Financials

 


So should you be worried about the next bank failure? I think that as long as your portfolio is well diversified you shouldn’t worry too much about day to day news but focus on the big picture and your long term financial goals. Historically it has paid off well to pick up distressed assets at bargain prices during bear markets. In addition to that dollar cost averaging your way into a position is the perfect strategy in a bear market. Check this chart out for the average durations of previous bear markets for reference as well.

Full Disclosure: I do not have any positions in the companies mentioned in this article.

Relevant Articles:

- Dollar Cost Averaging
- Average Durations of Previous Bear Markets
- My Dividend Growth Plan - Diversification
- When to sell your dividend stocks? Part 2

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