Yesterday a bearish report from Citi Investment Research analyst Keith Horowitz sent Bank of America shares 12% lower. The analyst announced that he was expecting further deterioration in Bank of America’s earnings, by cutting his projection for 2009 EPS to just $0.25/share. Given this information, the current quarterly dividend of $0.32/share might not be sustainable.
The analyst expects that Bank of America might have to cut its dividend again, which could happen as early as January 20, when the company reports its latest quarterly results.
As a long-term investor, I typically ignore articles like that, since I seriously doubt that anyone in the investment banking community has any sustainable forecasting abilities. Instead I try to focus on something that is not as volatile as stock prices – I focus on a diversified list of companies from a variety of industries that have consistently grown their dividends over time. Nobody knows where the market is going to be in one year, five years or a decade. If you are able however to pick the best dividend stocks for the long run, you will be able to generate enough dividend income from your portfolio that would cushion any unsustainably severe bear market declines.
In the case of Bank of America however, I won’t be surprised if the company does indeed cut its dividends as it faces further writedowns, frozen credit markets and TARP restrictions. Several once prominent banks have cut their dividends twice since early 2008. Investors who were hoping that the worst is over suffered significant declines in their passive incomes again and again. Some fresh examples of this include FITB, C and KEY.
In summary I believe that the issue of Bank of America’s dividends is not if it will cut, but when it will do so. Historically, one of the main reasons why companies have lost their dividend aristocrats status between 1989 and 2004 is dividend freezes or cuts related to merging two different companies or restructuring ongoing operations. In the case of BAC, the company has purchased Countrywide and Merryl Lynch, which definitely will pose huge integration issues. These integration issues might make the company’s business less transparent, which could also mean that BAC might not be a good value even at $11/share.
Relevant Articles:
- Bank of America (BAC) Dividend Analysis
- Why do I like Dividend Aristocrats?
- Historical changes of the S&P Dividend Aristocrats
- Dividend Aristocrats List for 2009
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Bank of America is yielding over 10% while facing large asset writedowns and negative earnings. A dividend cut is definitely coming.
ReplyDeleteMark,
ReplyDeleteThanks for stopping by. I also believe that BAC will cut its dividends again.
Good call! You were right about the dividend cut. I wonder if 2009 is going to be a terrible year for BofA...although they experienced losses in 2008, they were still able to weather the storm.
ReplyDelete