Tuesday, June 3, 2008

the most popular dividend in America

In my short history following stocks and participating in the stock market, I can't remember a set of dividends that was so anticipated, and so questioned as the upcoming Bank of America (BAC) pay outs. In November, 2007 when I purchased Bank of America shares I asked the question, Will Bank of America continue to raise its dividend year after year, and survive this credit crunch just as they have survived every financial crises in the past. At the time BAC was yielding 5.7% and I was betting that they would not cut their dividend, and that they would survive the credit crunch. Needless to say that even though I purchased BAC when the Loonie was trading around $1.07 vs. the Greenback, I am currently underwater on my BAC position.

Fast forward to today where BAC yields a whopping 7.8% and the CEO, Ken Lewis recently made the following comments:
Chief Executive Officer Ken Lewis said on Monday the second-largest U.S. bank has no plans to cut its dividend. "You have to do what is in the best interest of the company, but we see no reason to cut the dividend," Lewis said "

Should we believe Ken? Considering all the dividend payments in the U.S. banking sector that have fallen by the wayside, I'm not sure. WaMu, Citi, and Wachovia among others, have all cut their dividend since November, 2007. It does seem that Ken left some ambiguity in his statement. He sees no reason to cut right now, but he may see a reason in the future; if he does he'll do what is in the best interest of the company.

The next few dividend payments that BAC pays out will tell the story. If BAC raises their dividend within the next few payments I am certain that several dividend investors will be adding to their positions or getting in for the first time, as these yield levels are hard to pass up for a bank with such a solid history of dividend growth. One would have to assume that because of where BAC is trading today (7.8% yield), the market is pricing in a dividend cut.


Mr. Cheap said...

Yeah, I'm hopeful that his statement means what its says (not that its preparing investors for a future cut).

Interesting if you think that a dividend cut is already priced in...

Nurse B, 911 said...

Hate to be a downer, but didn't every other bank CEO make the same statement before they were ushered out the door & dividend slashed? BAC is currently approaching that point where the others cut by 30-40%. Judging by the drastic movement of the chart: either the stock is severly mispriced or the market expects a cut of that magnitude. I don't think you'll want to hear which of those I lean towards MG.

I continue to stay away from US financials completely due in part to their recent creative accounting practices and unknown/opaque obligations.

Paul said...

I've been adding to my BAC these last few days, relying heavily on Mr. Lewis' representations. But as you point out, this is a potentially risky dividend play so I didn't bet the farm. I'm inclined to think BAC has more downside and if I'm right, that will make the divi more attractive (to us) and easier for the Board to cut it. Even now, BAC could cut the divi 30% and that would make it an attractive dividend play.

I think nurse b is right. The market is pricing it for a dividend cut, but the market has been known to be wrong before.

And along with your post on GE, I've been averaging down on GE lately, too. Contrary to BAC, I see GE as oversold and getting ready to move up, but my guess and $4 will get you a cup of coffee.

Anonymous said...

Why not sell some naked puts just slightly out of money? 30 Jul puts are going for 0.70. Effectively, you are yielding about 14% if it expires out of money. If BAC falls under $30 due to a dividend cut, your effective purchase price is about $29.30. Even with a 40% dividend cut, you'd still get about 5.2% yield. Immediately sell some covered calls if you are afraid it will keep falling. Gives you quite a bit of downside cushion.

Jake (Dividend Investing Blog) said...

Unfortunately I have heard this story before from Wachovia's newly departed CEO. Hope BAC can pull it off. I have been dollar cost averaging through this cycle.

Assetologist said...

Nice comments. I have bought up BAC shares in increments since November 2007 as well. As this could be a 'forever' hold, I can wait out the return to solid profitability even if it takes years. I would like to hold onto at least a 4% dividend & believe this is not unreasonable based on their current balance sheet and prospects.
Dividends are the core of my financial freedom portfolio but by no means am I reliant on North American Blue Chips.

'Philosophy and Science of Wealth' at Assetology.com.

Thanks for sharing.

BlahBlah said...

There's no guarentee in this world and BAC is no different.

I continue to hold and will for the next 5 years

Doomsday predictions that were so well flogged 3 months ago have come back with vengence. Bears love to come out of hiding to scare as many as possible at times like this.

I'm sure Buffett faced many of this situations 30 years ago and I'm not backing down either, cut or no cut.

Anonymous said...

Brave on this one. Could go to 0 with Countrywide. It's not the dividend you should worry about, but the potential capital raising the support the balance sheet.

I'd stay away and let the credit crisis play out. If interest rates go up this stock's going down.