Wednesday, December 31, 2008

TARP is bad for dividend investors

TARP allows the United States Department of the Treasury to purchase nonliquid, difficult to value assets from banks and other financial institutions. TARP also allow the Treasury to purchase whole loans and make direct equity investments in banks themselves. The targeted assets are securities backed by mortgages, sometimes described by the government, media, and others as “troubled” or “toxic” assets.
As of November 12, 2008, $290 billion of the first $350 billion allotment funding TARP has been allocated, primarily to the Capital Purchase Program: $250 billion for bank equity infusions, and $40 billion for an equity infusion into insurer American International Group.[
The eight financial companies that were the first to have received TARP funds include:

Bank of America (BAC) (analysis)
Bank of New York Mellon Corp
Citigroup (C )
Goldman Sachs (GS)
JPMorgan Chase (JPM)
Morgan Stanley (MS)
State Street (STT)
Wells Fargo (WFC)

There were 44 other institutions that received TARP money, including USB, CMA, Northern Trust, Suntrust Banks, KeyCorp, RF, BB&T and others. Check out my analysis of USBank or my analysis of BB&T.

There is some talk that a TARP funding to banks essentially marks the end of their dividends.

"Restrictions on Dividends:
For as long as any Senior Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Senior Preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Senior Preferred), nor may the QFI repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Senior
Preferred or common shares, unless (i) in the case of cumulative Senior Preferred all accrued and unpaid dividends for all past dividend periods on the Senior Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred the full dividend for the latest completed dividend period has been declared and paid in full.


Common dividends: The UST’s consent shall be required for any increase in common
dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties."
Source TARP Capital Purchase Program

What really showed me that TARP program is serious, is a recent statement from State Street last week, which announced that it wasn’t going to raise its dividends in compliance with the restrictions on dividend rate increases generally imposed on all participants in the U.S. Treasury's TARP Capital Purchase Program.

Before that State Street (STT) was the only dividend aristocrat which had consistently increased its dividends twice per year for almost 27 years in a row.

Traditionally, financial shares were one of the best yielding stocks in the marketplace. It seems that TARP essentially is bad news for any dividend investors, as it could result in further decreases to already lowered payments. The lesson to be learned for individual investors is to diversify across sectors, no matter how great the yields look.

Disclaimer:

Long STT

Relevant Articles:

- My Dividend Growth Plan - Diversification
- My Dividend Growth Plan - Money Management
- Why do I like Dividend Aristocrats?
- Bank of America (BAC) Dividend Analysis
- BB&T Corporation (BBT) Stock Dividend Analysis

14 comments:

  1. That is surely bad news for dividend focused investors. I am holding on to BAC for the large capital gain that I will make on the stock in future years, as well as long term dividend growth.

    Have you ever considered adding a search function to your blog?

    ReplyDelete
  2. MG,

    There is a search box in the upper left portion of the blog. I guess I could add google search on my blog as well but that would be a work in progress.

    TARP is not good for bank dividends. I own STT which didn't increase its dividends when it should have. With TARP the whole financial sector in the US is dependend on the govt.

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  3. Good point. I think any company that gets TARP funding in the future will be forced to eliminate their dividends.

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  4. Welcome the United Socialist States of America.

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  5. Alot of the bigger banks are paying the TARP money back but oddly the small banks are lining up in droves. The feds are handing out tens and tens of millions of dollars. Now would be a good time to start a small bank.

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  6. The printing presses are working overtime!!

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  7. Well this is nothing new sadly but it is a good point

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  8. Thanks for the information. I really enjoyed reading it!

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  9. That is some great information, thank you for your advice :0)

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  10. Yeah, I'm not quite sure what to think anymore. Thanks for posting this

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  11. I have to agree with Tarp being bad for the investors. I was holding onto BAC through the hard times and thankfully made it out alive, and with some profit.

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  12. Dividens arent always bad news, I found this article to be useful :-)

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