Tuesday, October 7, 2008

B of A gets the scissors out

Bank of America (BAC) finally cut their dividend by 50% which saves about $1.4 B per quarter. I've talked a lot on this blog about whether or not BAC will cut their dividend and now they finally have. The credit crisis has obviously got to a point that is much worse than anyone had imagined. BAC recently purchased Merril Lynch and they're also paying out a lot of money for bad loans, lawsuits, etc. related to the Countrywide Financial acquisition. These needs, along with the fact that the credit crunch got worse than expected with many casualties, were probably paramount in the decision to cut the dividend. My initial bet that BAC would not cut the dividend as one of my reasons for purchase, was wrong.

Having a firm that you own cut their dividend is probably the worst thing that can happen to a dividend investor. In this case because BAC was such a small part of my portfolio (about 3%) this dividend cut barely affected my income from investments. Another factor that is really offsetting its affect is the appreciation of the U.S. dollar recently versus the Loonie. The dividends that all of my U.S. holding are paying me have become more valuable over the past few weeks. I will update my income from investments very soon.

I am holding on to my BAC shares despite the dividend cut for several reasons:
  • Now would be a terrible time to sell BAC, and if I were to sell I'd sell into strength
  • Because of all of the failures and consolidations in the U.S. financial industry due to the credit crisis Bank of America looks like it will turn out to be bigger and have more market share, talent, and influence in the global market which looks positive for the company going forward
  • Bank of America is currently the bulk of my exposure to financials outside of Canada which I intend to maintain exposure to
  • I believe the company still values dividend growth and should begin to re-grow the dividend after credit and economic conditions stabilize


Nurse B, 911 said...

And that's what you should do if you believe nothing fundamental has changed in their long-term strategy and ability to grow in the future. The dividend cut was prudent from a management perspective even if it hurts investors in the pocket. Not cutting could have meant that BAC would be severely handicapped over the short-term and you'd rather a company have some breathing room than be on a ventilator for any extended period of time.

MG (moneygardener) said...

BAC's dividend cut is the talk of the dividend investor blogs. I've made certain to comment with a sad face everytime I read about it.

Dividend Growth Investor said...

I am not going to mention BAC untill next week :-)

I would have probably sold BAC if I owned it ( from a dividend perspective). But if you believe that BAC will survive the crisis then holding it could be a wise long-term move. The issue with BAC is that they are dilluting the common shareholder by overpaying for MER ( could've waited for 1 week and buy it on a monday that MER is close to insolvent), selling billions in preffered and common stock.

BAC could survive. Yet that doesn't mean the stock price will go up 10 times in ten years.

Mr. Cheap said...

Definitely a sad day for BAC shareholders and dividend investors. I've already lined up a post about this for tomorrow...