Tuesday, June 30, 2020

Simon Property Group (SPG) and Wells Fargo (WFC) to cut dividends

Right after the market closed on Monday, June 29, I learned that Simon Property Group (SPG) is cutting dividends per share. Simon is a real estate investment trust engaged in the ownership of premier shopping, dining, entertainment and mixed-use destinations. Check my analysis of Simon for more details about the REIT.

The company declared a dividend of $1.30/share, which is 38.10% decrease over the dividend paid during the first quarter of 2020. The Company expects to pay at least $6.00 per share in common stock dividends for 2020, in cash, subject to Board of Directors approval. Since Simon already paid $2.10 in February, this means that it plans to distribute two more payments of $1.30/share through the end of 2020. That's fine, since the REIT essentially skipped its dividend for the second quarter of 2020.

Back in May 2020, the company ended up being ambiguous on its dividend, as it failed to declare a payment for the second quarter. There were several things happening, namely the acquisition of Taubman (TCO), the Covid-19 shutdown of its properties, and the difficulty in collecting rent from tenants. Since then we have had no visibility on the amount of rent that is collected, but judging by other peers it is likely low. Hence why Simon is in the news for trying to sue tenants such as The GAP for not paying rent.

Simon is also trying to cancel the merger with Taubman, citing the Covid-19 situation and using the deterioration in business as a cause to walk away from this transaction. While it may have to pay a steep fine to walk away, Simon may actually be bluffing its way to bring Taubman to the negotiating table, and lower the entry price for the deal. We could only speculate of course.

I had a very small position in Simon, which I just sold today. That dividend cut ended a 10 year streak of annual dividend increases. Ironically, buying Simon when it last cut dividends in April-May 2009 would have turned out to be a smart decision through 2018. If we look at prices today however, the returns are not as high since early 2009.

I also wanted to add to my article from Friday, about expectations for dividend increases and dividend cuts in the banking sector.

It turns out that the results for the initial stress tests are out. It turns out that the following banks are going to keep dividends unchanged in the third quarter:

- Goldman Sachs (GS)
- Bank of America (BAC)
- Citigroup (C)
- Ally (ALLY)
- State Street (STT)
- U.S. Bank (USB)
- BNY Mellon (BK)
- Discover Financial Services (DFS)
- Fifth Third Bancorp (FITB)
- PNC Financial (PNC)
- American Express (AXP)
- J.P. Morgan (JPM)

Jamie Dimon, Chairman and CEO of JPMorgan Chase said: “At this time, using both JPMorgan Chase’s and the Federal Reserve’s base case economic outlook, the Firm can continue to pay its dividend in future quarters while maintaining healthy capital and liquidity positons. If there is a significant deterioration in the future outlook, the Firm will, of course, consider reducing dividends.

The only major bank that won't be keeping dividends unchanged is Wells Fargo (WFC). (Source)

"The company expects its common stock dividend in third quarter 2020 will be reduced from the current level of $0.51 per share. The company expects that the level of the third quarter dividend will be announced when it releases second quarter financial results on July 14, 2020."

This would be the first dividend cut for Wells Fargo since the Global Financial Crisis. Back in March 2009, the bank cut dividends as part of the TARP program. Incidentally, that was a great time to buy Wells Fargo below $10/share. The stock rebounded and went as high as $65 by early 2018, but has slowly gone downhill from there. Buffett is one of the largest holders of Wells Fargo, and is likely not very happy with the outcome. The bank was one of the strongest a decade ago, but its been mired in scandals related to fictitious account openings, and its size of operations has been capped.

I had a very small position in Wells Fargo. I built it in 2013, but stopped adding after raising some concerns that noone else paid attention to at the time. After all, if Buffett was buying, it was good enough. The nice part of my risk management procedures is that I usually build positions slowly, always doubt myseld and if the story changes, I stop buying more. When I am wrong, I like to keep losses low. I believe in keeping losses low, while trying to maximize future dividends and capital gains.

Relevant Articles:

Wells Fargo Joins the Crowd of Dividend Cutters
Should you invest in Wells Fargo (WFC)?
Why Warren Buffett Likes Investing in Bank Stocks
Simon Property Group (SPG): A High Yield and High Risk REIT
Expect Dividend Cuts and Dividend Freezes in the Banking Sector

Popular Posts