Thursday, January 22, 2009

Can USB and WFC maintain their current dividends?

There has been a lot of speculation lately that Wells Fargo and US Bank will seek further TARP assistance, which might lead to dividend freezes or even worse, dividend cuts. Investors fear that banks will follow Citigroup and Bank of America in getting a second round of TARP financing as credit losses and provisions for credit losses keep increasing. While both USB and WFC are regarded as the strongest US banks at the moment and one of the few that will survive the financial crisis in their entirety, both companies are having a tough time convincing shareholders that they are a good investment.

In November, USB received $6.6 billion from TARP. In December the bank failed to increase its dividend to shareholders for the first time 37 years, which could lead to it losing its dividend aristocrat status. Yesterday the Minneapolis based institution reported a steep drop in 4Qearnings for to $0.15/share. This brings the 2008 EPS to $1.62. This marks the second quarter in a row that the company didn’t cover its current payments to shareholders. US Bank had to set aside $1.27 billion during the quarter to cover bad loans, compared to a loan loss provision of just $225 million in the fourth quarter of 2007. Furthermore the company continues to see deterioration in several of its loan portfolios, with chargeoffs to total loans ratio increasing to 1.4% from 0.6%. Its nonperforming loans stood at $2.62 billion, of which $0.64 billion were from the two failed California banks it recently acquired.
Investors ran for the exits, sending the stock to the lowest level since 1995. With its current yield of over 11% however, most investors are expressing serious doubts about the sustainability of the current dividend payments. Check out my analysis of USB from this link.

Wells Fargo is another financial institution whose shareholders are experiencing a roller coaster ride in their portfolios. On Thursday, an analyst from Friedman, Billings, Ramsay said the financial giant will likely have to cut its dividend. The analyst reiterated that current dividend reduces tangible common equity $5.65B annually. It remains to be seen what problems did Wells Fargo inherit with its most recent Wachovia’s acquisition. WFC was one of the first companies to receive bailout funds from the Troubled Assets Relief Program. This dividend achiever has increased dividends for 20 consecutive years. The current dividend of $0.34/share is well covered by earnings for the first three quarters. Wells is scheduled to report 4Q earnings on January 28, which will provide a better guidance to credit losses and issues related to Wachovia’s acquisition.

Full Disclosure: None

- TARP is bad for dividend investors
- Dividend Aristocrats List for 2009
- USB Dividend Analysis
- Bank of America (BAC) might have to cut dividends

2 comments:

  1. I will be especially interested interested to see if Wells Fargo cuts their dividend as a long term holder of Wells' stock.

    ReplyDelete
  2. Mark,

    I think that WFC has a lower chance of cutting its dividend, compared to USB. But the earnings release will provide any additional info on the merger with Wachovia.

    ReplyDelete

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