Monday, March 9, 2009

Another day, another dividend cut

Capital One Financial Corporation (COF) is the latest financial company to cut its dividend. Capital One decreased its quarterly payment to $0.05/share from $0.375 in an effort to preserve more than $500 million in capital annually.

Richard D. Fairbank, Capital One's Chairman and Chief Executive Officer said "We're moving today to reduce future dividends because in today's unprecedented economic and market conditions, our highest priority is managing our balance sheet to maintain its considerable strength and resilience. In addition, our ongoing dialogue with investors indicates that they value strong capital positions over dividend streams at this point in the cycle. Today's announced action is one of the most efficient ways to support capital levels in the current environment. The capital we preserve through the reduced dividend will reinforce our already-strong capital position, increase our flexibility to manage through the downturn, and enhance our ability to repay the U.S. Treasury Department's preferred stock investment as soon as it is prudent and appropriate to do so. When the economy recovers, we expect that returning capital to shareholders will once again be a key part of how we deliver value over the long-term."

The problem with Capital One however is that it was never a true dividend growth stock. It pretty much paid the same quarterly dividend of $0.0267 for 13 years. Then in January 2008 the company increased its dividend to $0.375 and initiated a $2 billion stock buyback program. Investors.

Because Capital One never had any record of consistently increasing dividends, I doubt that any dividend growth investors suffered as a result. The company that charges exorbitant rates to credit card holders should have rewarded shareholders better by sharing its prosperity through consistent dividend increases. The current dividend payment is still twice the size of the dividend payment in place over the whole 1995- 2007 period. I would not have been a holder of this stock as it never raised its dividend consistently even for ten years, unlike Citigroup, Bank of America, US Bancorp and Wells Fargo. Nevertheless I would consider selling Capital One (COF) shares as one never knows when their equity would be diluted by TARP preferred shares that the government owns. In November, 2008, Capital One Financial Corporation was the recipient of $3,555,199,000.00 of the Emergency Economic Stabilization Act Federal bail-out in the form of a preferred stock purchase.

If you still hold any financial shares and hope to generate dividends from them, check out whether your company that you own shares is on the TARP recipient list. If it is, chances are it will cut or suspend its dividend to you the shareholder. The typical excuses used by CEO’s are that this would make the company stronger and maintain its liquidity, or that would enable the company to repay the TARP money back. The best comment is that once the situation stabilizes, the dividend would once again become a priority.

Full Disclosure: None

Relevant Articles:

- When to sell my dividend stocks?
- TARP is bad for dividend investors
- Dividend Cuts - the worst nightmare for dividend investors.
- Wells Fargo Joins the Crowd of Dividend Cutters

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