Friday, February 6, 2009

My take on State Street’s dividend cut

Yesterday, the board of State Street (STT) announced that they would be cutting the quarterly dividend from $0.24/share to $0.01/share. STT joined the ranks of other financial institutions such as Bank of America (BAC) and Citigroup (C) with in this move to bolster liquidity. After reading this announcement I immediately sold all of my STT holdings. I also plan on removing the stock from my Best Dividend Stocks for the long run list.

The reason why I purchased STT in the first place was the fact that it was the only dividend aristocrat that had a long history of consistent dividend increases. In fact for the past 27 years STT had been increasing its dividends twice a year, which is the only dividend aristocrat to do so. Asides from the growing dividend, I also liked the fact that the company was engaged in Investment Servicing and Investment Management. STT also has managed to deliver an 11.20% average annual increase in its EPS between 1998 and 2007. In addition to that, the dividend was adequately covered, with the dividend payout ratio never exceeding 30% over the past decade.

As a result of the dividend cut and the other moves, State Street revised its previously reported 2008 earnings to $4.30 per share from $3.89, which also boosts return on shareholder equity. The steps were taken as part of a plan to strengthen State Street's tangible common equity ratio, which is a measure used to compare the bank's capital adequacy with its goodwill and other intangible assets. 2009 earnings are expected to be between about $4.94 and $4.71 per share. It also eliminated bonuses for its top five executives for 2008 and roughly halved incentive compensation for the rest of the company.

I did see the situation at State Street worsening, after it received TARP money and especially after it announced no intention to increase dividends for the time being after reporting lower than expected quarterly results last quarter. This has put the dividend aristocrat on a danger list to be kicked out of the prominent dividend index. S&P would most probably remove this financial company from the elite group of dividend companies pretty soon.

Despite the warning signs however, I still believed that the dividend would not be cut, because it was very well covered. I strongly doubt that STT management believes in their ability to deliver 2009 earnings, exactly because of the dividend cut. If it were really convinced that 4.71 to 4.94/share was achievable in 2009, then paying out a measly 0.96/share wouldn’t have changed anything that much.

This is my second dividend cut in my portfolio since the start of the financial crisis. In the meantime I will be inspecting more closely any financial related holdings in my portfolio and assessing the risk of further dividend cuts in the future. I will also look for other companies to replace STT in my dividend portfolio.

Full Disclosure: None

Relevant Articles:

- TARP is bad for dividend investors
- Dividend Aristocrats in danger
- State Street Corporation (STT) Dividend Stock Analysis.
- Best Dividends Stocks for the Long Run
- Dividend Cuts - the worst nightmare for dividend investors

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