Linked here is a PDF copy of my detailed analysis of Bank of America Corporation (BAC) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: Bank of America Corporation is a financial holding company providing banking and nonbanking financial services in the United States and internationally.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. BAC is trading at a discount to only 1.) above (Avg. High Yield Price ). If I exclude the high and low valuation, and average the remaining two valuations, BAC is trading at a significant premium (26.0%). A Star is deducted since BAC is trading at a premium in excess of 5%.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. BAC earned one Star in this section for 3.) above. BAC has grown dividends for at least 10 years. It has paid a dividend since 1903 and has increased them for the last 20 yeas. Last years dividend payout was 73%, up form 46% in 2006. Since the increase was in excess of 15 point, a Star is deducted, leaving a net of zero Stars in this section.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. BAC earned two Stars in this section. BAC's NPV MMA Diff. is a strong $27,956 and is current earning more than the 4.61% money market rate.
Other: BAC is a member of the S&P 500, an Aristocrat and an Achiever. BAC has strong business fundamentals, a good customer base, a diverse product line and large geographic presence. These factors should help it to withstand a major economic downturn. BAC should continue to benefit favorable interest-rates.
Conclusion: BAC lost a Star in the Fair Value section, earned and lost a Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 1 Stars. This rates BAC as a 1-Star Very Weak stock.
September is the month that BAC normally increases its dividend. The question is, what will they do? Increase, hold steady or drop? BAC has not earned its dividend for the past two quarters and has an above-peer dividend yield.
BAC is a proud company and I would be surprised to see a dividend cut based on their financials. Over the last four quarters cash has been between $35 and $40 billion. Short-term borrowings have inched up from $380 billion (06/2007) to $410 billion (03/2008). Operating cash flow has been negative for three of the last the four quarters, but cumulatively it is positive.
If BAC raises its dividend in September it would likely only be a token increase of 3% or less. More importantly, it will be a strong message about management's confidence in the future. I would likely add some shares just to lock in a 7+% dividend yield.
Like HD, BAC can hold its dividend flat until December 2009 and still show calendar year increases in 2008 and 2009. I see this as the most likely scenario. management can take a wait and see approach without damaging its dividend status. In this case, I would put BAC on the shelf until its future becomes a little more clear.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I owned shares of BAC (4.0% of my Income Portfolio).
What are your thoughts on BAC?
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Conclusion: BAC earned one Star in the Fair Value section, one Star in the Dividend Analytical Data section and two Stars in the Dividend Income vs. MMA section for a total of Four Stars which rates it as a 4-Star Buy. 
Linked here is a PDF copy of my detailed analysis of Bank of America Corporation (BAC). Below are some highlights from the above linked analysis:
Company Description: Bank of America Corporation is a financial holding company providing banking and nonbanking financial services in the United States and internationally.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. BAC is trading at a discount to three of the four valuations listed above. If I exclude the high and low valuation, and average the remaining two valuations, BAC is trading at a 12.8% discount. BAC gets a Star for being fairly valued.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. BAC only earned one Star in this section for 3.) above - it has grown dividends for 10+ years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. BAC earned Stars for both 1.) and 2.) above.
Other: BAC has seen recent growth in its online business which has helped to improve operating efficiencies. With the acquisition of U.S. Trust, BAC looks to expand more into the highly profitable private banking business. Mostly as a result of the sub-prime crisis, BAC current valuation offers a sporty yield of 5.93% (as of 11/25/07).
Disclaimer: As always this is only my opinion and you should not rely on it. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I own shares of BAC.
What are your thoughts on BAC?
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Part of my kids' college fund is invested in Vanguard's S&P 500 Index Fund (VFINX). When I opened the October statement, I was mildly surprised to see the net asset value had fell below the September 1997 level when the account was first opened. Over the year I have become somewhat disenchanted with mutual funds, ETFs and CEFs due to their recent poor performance relative to my dividend investments.
So what would have happened if I had invested my kids' college fund following a dividend investing strategy? It is difficult to say exactly, but I can make some assumptions and see where it takes me.
Ground Rules
For simplicity, I will select five dividend stocks and purchase $1,000 in each and put $5,000 in VFINX using the closing price on September 30, 1997. Dividends will be held and reinvested on the last day of the year at the closing price. I will ignore commissions and taxes. Final valuation date is as of the end of November 2008, except for BAC (see below). Information was pulled from Yahoo Finance.
Stock Selection
This obviously is the most difficult portion and requires the most self-honesty. I will try to reason what stocks I would have purchased in 1997 without looking at their performance. Since it was for my kids' education, I intentionally avoided the more risky stocks, including REITs. Here are the five stocks I selected and my thoughts as to why:
One other stock I considered was General Electric (GE). However, in the late 90's I viewed it more as a growth stock. Let's build the spreadsheet and crunch some numbers.
Results
First let me say that there is nothing definitive you can draw from this analysis - the scope is much too narrow. However, there are some interesting items to consider that could lead to a deeper analysis. With that said, I was somewhat surprised at the results. It was not a good decade for any of the investments that I looked at. The ones I thought would perform well, did not. Here is a summary of the S&P and the five dividend stocks:S&P 500 (VFINX)
The dividend stocks earned more dividends than the S&P, but also lost more on invested capital. Overall, the return for the dividend stocks was a little over a quarter percentage point higher than the S&P 500. That somewhat surprised me; I expected it to be more. Looking at the individual stocks was quite interesting and not entirely what I expected:
Appreciation as a % of Invested Basis: -10.44%
Total Shareholder Return: 0.90%
Total Dividends Reinvested: $1,168.53
Dividend Stocks In Total
Appreciation as a % of Invested Basis: -13.10%
Total Shareholder Return: 1.25%
Total Dividends Reinvested: $1,609.95Johnson & Johnson (JNJ)
To be honest, I was surprised at how weak JNJ's and PG's performance were over the period. The entire performance of the group was carried by ED. With a -4.35% TSR, BAC actually held up better than I thought it would.
Appreciation as a % of Invested Basis: -0.12%
Total Shareholder Return: 1.47%
Total Dividends Reinvested: $177.96
Procter & Gamble Co. (PG)
Appreciation as a % of Invested Basis: -7.41%
Total Shareholder Return: 0.46%
Total Dividends Reinvested: $136.52
The Coca-Cola Company (KO)
Appreciation as a % of Invested Basis: -20.77%
Total Shareholder Return: -0.73%
Total Dividends Reinvested: $163.21
Bank of America (BAC)
Appreciation as a % of Invested Basis: -52.09%
Total Shareholder Return: -4.35%
Total Dividends Reinvested: $270.61
Consolidated Edison, Inc. (ED)
Appreciation as a % of Invested Basis: 6.61%
Total Shareholder Return: 6.33%
Total Dividends Reinvested: $861.66
What If..
One case I looked at was substituting BBT for BAC. BBT's performance was better than BAC's but not dramatically. Here are the combined results with BBT in place of BAC:Dividend Stocks In Total - BBT instead of BAC
Conclusion
Appreciation as a % of Invested Basis: -10.05 vs. -13.10%
Total Shareholder Return: 1.56% vs. 1.25%
Total Dividends Reinvested: $1,610.91 vs. $1,609.95
Contrary to my earlier statement, one valid conclusion can be drawn from this exercise. You should always analytically test your beliefs, because they may not holdup under the microscope.
If you want to see the spreadsheet I used to derive the above data, it is available on my Tools page as Div-Investing-vs-SandP.xls.
Full Disclosure: Long VFINX, PG, JNJ, KO, PEP, BBT and ED
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Someone once said that there is no such thing as bad publicity. I think Bank of America (BAC) would take exception to that statement. BAC has been in the news all week and it has not been flattering or reassuring to it shareholders. This once proud dividend aristocrat continues to struggle even after slashing its dividend.
Monday, Citigroup (C) issued some cautious comments on BAC and said investors should be braced for a very challenging 4Q. C cut Q4 EPS estimates, expects another dividend cut and expects the company raise fresh capital, but will wait for a better environment. Ultimately, C sees cumulative credit losses of $165 billion for 2008-2011, with only about 33% recognized so far.
Yesterday it was reported that BAC needs more aid from the government for its Merrill Lynch acquisition. To date, BAC has received $25 billion from the Treasury Department's Troubled Assets Relief Program (TARP). According to the The Wall Street Journal, BAC needs additional assistance to deal with an ugly quarterly report from Merrill. By mid-day Thursday shares were down 20% to around $8.
Not all news was bad this week. Instead of looking for a government handout, several companies continue to increase the cash given to their shareholders through higher dividends. Here are a few:
When BAC cut its dividend it no longer met the criteria for inclusion in my income portfolio. There is a reason that my most basic investing rule is to immediately sell a stock after it cuts its dividend; I BAC sold at $28.51/share after its first dividend cut.
Disclosure: No position in the aforementioned securities.
(Photo: Steve Woods)
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When I saw the announcement that Bank of America (BAC) would acquire Merrill Lynch, I was concerned about the combined company's ability to sustain its dividend. Unfortunately, my concerns were validated with an after the market announcement that BAC would cut its dividend to $0.32/share, down from $0.64/share. Below are excepts from the news release:The company also announced two initiatives to raise capital, targeting an 8 percent Tier 1 capital ratio. The company intends to sell common stock with a target of raising US$10 billion. In addition, the Board of Directors has declared a quarterly dividend on common stock of US$0.32 to be paid on December 26, 2008 to shareholders of record on December 5, 2008. Assuming the current number of issued and outstanding shares, the reduction from US$0.64 paid in recent quarters would add more than US$1.4 billion to capital each quarter.
BAC closed the day at $32.22 down $2.66 or 6.55%. At 7:00pm Central, BAC was down an additional $3.24 (10.06%) in after-hours trading.
"These are the most difficult times for financial institutions that I have experienced in my 39 years in banking," said Kenneth D. Lewis, chairman and chief executive officer. "We believe it is prudent to raise capital to very substantial levels in this uncertain environment. Both economic and financial market conditions have changed significantly in the last two months. We were willing to operate at capital levels over the short-term that were good, but not at our targeted levels, given projections two months ago. We now believe it is important to be at or near our 8 percent Tier 1 capital ratio target given the recessionary conditions and outlook for still weaker economic performance which we expect to drive higher credit losses and depress earnings. We believe that achieving higher capital levels today will position our company to provide credit to those consumers and businesses that are attracted to our strength and stability.
My investment process requires me to sell a company if it cuts its dividend. My portfolio was over-weighted in banks and I knew ultimately it the weaker ones would reveal themselves, thus it would be those that I sold. BAC is the first shoe to drop. As I say each time this happens, "my portfolio just got stronger."
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Early in the pandemic, I bought Bank of America (NYSE:BAC) stock for my retirement account. I believed interest rates would rise, and that when money cost money, the big bank would prosper. I was still confident in January 2022, but I was wrong. Since the pandemic began abating, as interest rates have risen, BAC stock has been a poor investment. Over the last two years it’s down 38%, while the market has been flat. In 2023 it’s down 17%, while the S&P average is up 14%. I admitted this to myself and sold out of BAC in February. Is it time to get back in?
The turn will come. Interest rates will stabilize. When that happens, Bank of America will benefit more than its peers, because it has been hurt more. If you wait until after the turn, you’ll miss the easy profits. Even the hint of a turn sent BAC stock up 3% on October 10. This makes BAC the safest speculation a long-term investor can make right now. You’ll likely get the dividend while waiting, but then earnings will rise, along with the PE multiple, and you’ll look like Warren Buffett.
Source: InvestorPlace
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You may think your greatest wealth building asset is the Chevron (CVX) stock you purchased 3 years ago. Even though your brilliant purchase has appreciated over 50% in the last 3 years in the face of a bear market, it is not your greatest wealth building asset.
Traditionalist would say your home is your greatest wealth building asset. This is getting closer, but it is not your greatest wealth building asset.
Others would say your income is your greatest wealth building asset. Thought there is a lot of truth to the statement, it is still not your greatest wealth building asset.
So, what is your greatest wealth building asset? Everyone is born with it. Few realize its importance until they lose most of it. The asset is so valuable it can't be bought. Your most valuable wealth building asset is time.
As a value/dividend investor, I have learned that time can cure many mistakes and provide enormous investment leverage. Consider these stocks:
Johnson & Johnson (JNJ): Let's say on August 25, 1987 you purchased 1,529 shares of JNJ at $6.539/share or about $10,000 worth. This was JNJ's closing high for 1987. By December 31, 1987, your investment was only worth $7,156 - a 28% drop. It wouldn't be until June 9, 1989 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don't recommend), it would have been worth $103,238 at the July 21, 2008 mid-day price of $67.52. This is about a 12% compound annual return, excluding dividends.
General Electric (GE): Same scenario, on August 20, 1987 you purchased 1,821 shares of GE at $5.49/share or about $10,000 worth. This was GE's closing high for 1987. By December 31, 1987, your investment was only worth $6,696 - a 33% drop. It wouldn't be until January 2, 1990 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don't recommend), it would have been worth $50,638 at the July 21, 2008 mid-day price of $27.80. This is about an 8% compound annual return, excluding dividends.
Bank of America (BAC): You know the drill. On August 25, 1987 you purchased 1,397 shares of BAC at $7.156/share or about $10,000 worth. This was BAC's closing high for 1987. By December 31, 1987, your investment was only worth $6,025 - a 40% drop. It wouldn't be until August 5, 1988 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don't recommend), it would have been worth $40,960 at the July 21, 2008 mid-day price of $29.32. This is about an 7% compound annual return, excluding dividends, for a stock that is currently battered and beaten.
In all three examples above, the stock was purchased at its high before the 1987 crash/panic. Some recovered more quickly than others, but all recovered. The key is to buy good-solid companies, and be prepared to hold them through the good and the bad. All three of the companies above are S&P Dividend Aristocrats, or companies that have increased their dividends in each of the last 25 years. How long should you plan on holding a stock? That's easy, To Infinity and Beyond!
At the time of this writing, I owned JNJ, GE and BAC.
(Photo: peter mueller)
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29 out of 30 isn't too shabby. The Federal Reserve released the results for its latest stress test, and 29 out of America's largest 30 banks met their required capital requirements. Only Zions Bancorporation (ZION) - a relatively small player - failed to make the cut. Credit card issuer Discover Financial (DFS) received a clean bill of health and responded much as its shareholders might have hoped - by raising its quarterly dividend by 4 cents to 24 cents per share.
The Fed has been pretty good at playing its cards close to the vest. But based on the results of the stress test, we can handicap the odds that they will allow a dividend hike on a bank-by-bank basis. Let's use Bank of America (BAC) as an example. The Fed found that BAC's Tier 1 leverage ratio would fall to as low as 4.6 percent under the "severely adverse" scenario, only slightly higher than the regulatory minimum of 4%. Still, with "excess" capital of about $13 billion, the consensus view is that BAC will raise its quarterly payout from one cent per share to ten cents. Citigroup (C), which, like BAC, currently pays out 1 cent per share quarterly, is expected to raise its dividend to about 5 cents. At current prices, that would give it a yield of about 0.40%. JPMorgan Chase's (JPM) annual dividend is expected to rise from $1.52 per share to $1.67 per share, giving it a yield of about 2.8%.
Source: Seeking Alpha
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Big banks continue to struggle and rely on TARP funds to prop them up. Last week Bank of America (BAC) reported a net loss of $0.48 per share for the fourth quarter, well below the consensus of an $0.08 profit. Merrill Lynch's preliminary results indicate a fourth quarter loss of $15 billion due to the turmoil in the capital markets. The U.S. government agreed to provide BAC an additional $20 billion to assist in the Merrill acquisition. In addition, the government has agreed to provide BAC protection against certain losses on $118 billion in selected capital markets.
The TARP money comes with strings. One of which is a reduction of common dividends. BAC declared a first-quarter dividend of $.01 per share. The company's previous two dividends were $0.32 and $0.64 per share. Not to be out done, Citigroup (C) declared a quarterly dividend on the company's common stock of $0.01 per share. Its last two dividends were $0.16 and $0.32 per share.
Tuesday, concern spread to Wells Fargo (WFC) after analysts at Friedman Billings Ramsey said Wells Fargo will likely cut its dividend in the first half of the year because the bank needs to conserve cash. That resulted in a 20% drop in its share price. Then yesterday, SunTrust Banks, Inc. (STI) reported a fourth quarter loss of $1.08 per share and reduced its quarterly dividend from $0.54 to $0.10 per share.
While the big banks are taking government funds and slashing dividends, here are some smaller banks standing strong by raising dividends:
Today's market has been challenging to even the most seasoned investors. Dividend stocks provide an opportunity for long-term growth and income if we follow a few simple rules.
Disclosure: No position in the aforementioned securities.
(Photo: Steve Woods)
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I am not a stock trader; I am a dividend and value based long-term buy-and-hold investor. When I add a stock to my dividend portfolio, it is my intention to hold the stock forever. I am not smart enough to time the daily gyrations of the stock market. When stock prices start dropping, our primal instinct of flight kicks in and we want to sell. In many cases that is the time to be buying. However, sometimes selling a stock is the right thing to do.
In determining when to sell a dividend stock, I have one hard and fast rule: When an individual stock held as a dividend investment lowers its dividend, immediately sell it. This may seem like a stringent rule and I have taken a lot of criticism for it from both directions.
Some have said waiting until a stock drops its dividend is too late. There were rumors and innuendos that Bank of America (BAC) was going to drop their dividend some time before it was announced. As it turns out, the rumors were correct this time. However, I can't (and won't) base investment decisions on innuendo or rumor.
Others have said that selling a stock after it cuts its dividend is too early. Their argument is the bad news has already been priced into the stock and you are selling into weakness. I feel strongly that an immediate sell is the correct thing to do for the following reasons:
I. Cockroach Theory
When a company that has a long history of raising dividends and suddenly stops, it is usually more than a simple bump in the road. For the one cockroach you have seen (lower dividend) there are probably hundreds waiting to reveal themselves.
II. Adultery Theory
I view a dividend cut as financial infidelity by the company. After a company has raised its dividend 10, 20, 30 or more years that first dividend cut is very hard. Like someone who first has a series of affairs after 30 years of marriage, the first one is guilt ridden, but it is much easier the second time around. Eventually, the guilt goes away. Do you think Citigroup (C) would have the same difficulty cutting its dividend again? In the case of C, I sold part of my position when it became evident that their capital structure could not sustain the company going forward without a substantial cash infusion.
III Experience
My experience has been once a company cuts its dividend, the stock continues down. That has been the case with these that I sold after a dividend cut (prices as of 10/13/08):
Sure BAC will likely come back over time, but WM and WB will never come back. Even assuming BAC will come back at some point in the future, I likely would have been better to sell, wait for the 30-day wash sale window to clear and buy it back (see IV below on why this is not an option for me.)
IV Portfolio Goals
The most important reason for selling a dividend stock after it cuts its dividend is that the investment is no longer aligned with my dividend portfolio's goal of building an ever-increasing source of dividend income. Some have argued that certain securities are good value plays after a dividend cut. This may or may not be true, but my dividend portfolio's primary objective is dividend income, not capital gains. I have a separate portfolio for that. To date, I have not transferred any dividend stocks to my capital appreciation portfolio.
Finally, some will say that it was the "right" thing to do for the company to cut the dividend given the circumstances. In many cases I do not disagree. However, in the cases I have been involved with the company was not "given" the circumstances, they created them through their own actions. If a company was truly a victim of circumstances which couldn't possibly be foreseen or planned for, I would gladly to cut them some slack and consider an exception to my rule. This situation rarely ever comes along.
Disclosure: No position in any of the aforementioned securities.
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As noted in my articles Yield on Cost: Measuring for Success and Investing Goals, I consider Yield on Cost (YOC) an important metric. As such, I track it on each of my individual dividend income investments.
In the article The Winning Score - Part 2 of 2, I extracted from my two massive financial spreadsheets a sample model [it is linked on the tools page as D4L-Portfolio.xls] from the portfolio section. This model contains several elements worthy of discussion. Today we will focus the Yield On Cost (YOC) calculation.
YOC is tracked in columns Q and R. Rows 1, 2 and 3 provide a color-coded key for your reference. Cell Q11 contains the investment's most recent yield, R11 provides a weighted-average YOC for all the shares of the investment held.
Moving down one row, cell Q12 displays what the BAC's yield was on 4/22/2005, when I purchased 34 shares. In this case it was 4.01%, based on a quarterly dividend of $0.45, as shown in cell R13. Since I purchased BAC on 4/22/2005, the quarterly dividend has increased to $0.64 per share. Cell R12 contains the YOC for the 4/22/2005 purchase. You can see the dramatic effect of the three dividend increases, taking the initial yield of 4.01% to a 5.71% YOC.
In cells Q14, Q20, and Q27, you can see BAC has had some impressive dividend increases of 11.11%, 12.00% and 14.29%, respectively. On the date of each subsequent purchase of BAC, the per share price and current yield (col. Q) were higher than my initial purchase. This means the dividend per share was rising faster than the share price - From 04/22/2005 to 07/05/2007 the share price increased 10.8% while the dividend increased 42.2%.
The date in cell A1 has been hard-coded to =DATE(2008,2,4). If you decide to use some variation of this model, you will want to change the formula in cell A1 to =NOW(). This will populate the cell with the current date, which in turn will constantly update the YTD and LTD IRR calculations.
As always, I hope you find this model entertaining and useful.
Disclaimer: This model is for illustrative and educational purposes only. The author and Dividends4Life makes no claims or assertions as to the model's accuracy, completeness, appropriateness of use, or any other claim or assertion. You should not rely on this model or base any financial decisions on it.
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If BAC was the good-guy bank this week, here are a few of bad-boys. Wachovia (WB) reports a Q2 loss of $4.20 and cuts its dividend to $0.05. KeyCorp (KEY) cuts dividend 50% to $0.1875; Regions Financial (RF) misses Q2 EPS by $0.03 and slashes its dividend. Another two dividend Aristocrats fall off the wagon. 
With Bank of America's (BAC) big announcement this week, there appears to be life after financial crisis. Will it last? Who knows. If you are a dividend investor, it doesn't matter. If the market goes up, you can enjoy your paper-profits on recent purchases. If it goes down, it provides more opportunities to pick up some value-priced bargains. Below are several companies that increased their dividends last week:
Disclosure: Long in BAC
(Photo: Steve Woods)
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I thought Bank of America (BAC) was strong enough to survive without cutting its dividend. It was better managed than Citigroup (C) and wasn't in near the dire straits that C was in when it was forced to cut its dividend. This all changed with the announced acquisition of Merrill Lynch. When a company such as Merrill is sold at a fire sale, there usually is a reason. BAC is now learning why Merrill was so favorably priced - they got what they paid for. Is this same situation playing out with Wells Fargo's (WFC) acquisition of Wachovia?
Once considered to be the best run bank in America by many analysts, WFC is starting to struggle. Did the WFC executives turn a blind eye to the underlying financial data and only focus on the prize they had been eying for some time? From an outsider looking in, this appears to be the case. After a much larger loss in the fourth quarter than expected, most analysts that follow the bank believe a dividend cut is inevitable and, like BAC, a second trip to the TARP trough could be in the works. Are the shareholders possibly looking at a $0.01 dividend in the future?
Analysts from Friedman, Billings, Ramsey & Co. in a January 29 note pointed out that WFC only remained “well capitalized” by regulators’ lights because of the government’s $25 billion TARP injection. WFC’s 7.88% capital cushion does not compare well with other troubled banks such as Citigroup (11.8%), J.P. Morgan (JPM) (10.8%) and Bank of America (10.7%).
Other warning signs include a sharp increase in the amount of assets held for sale $178 billion from $106 billion in the prior quarter. Goodwill climbed to $23 billion from $14 billion. In this environment, goodwill is a difficult asset to justify to the auditors and ultimately to the Securities and Exchange Commission (SEC). Could future impairments be in the works, as Wachovia did in it final days?
There is reason to be concerned. Though the actors are different, I have seen this play before and the outcome is tragic.
Full Disclosure: No position in the aforementioned stocks.
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A 2003 CNN-Money article described Charles Mangum as such:
As the son of a Merrill Lynch broker, Charles Mangum has always been fascinated by the market. At age 14, he bought a few shares of convenience-store chain Circle K and watched his investment double. "I thought, 'This is so much fun,'" says Mangum.In 1990, Charles joined joining Fidelity Investments and worked as a research analyst and portfolio manager. Since January 1997, he has worked as vice president and manager of Fidelity's Dividend Growth Fund (Prospectus) and also manages other Fidelity funds.
A few years later, he suffered his first loss when another of his picks, Nichols Oil, went bankrupt. Mangum was unfazed. "It didn't change my view of stocks," he says. "I knew I loved investing."
His investment philosophy is to find mature growth stocks that tend to be less risky and stronger financially. The emphasis on strong balance sheets steered him clear, for the most part, of tech bubble in the late 1990's. His portfolio is typically concentrated in health-care, consumer and financial stocks, mainly large-caps and midcaps. That is not to say his fund does not take chances. Charles makes concentrated bets by scooping up troubled but financially strong companies.
Charles is now 42 years old and according to a recent Motley Fool article, the Fidelity Dividend Growth fund has beaten 80% of its peers over the past decade. The article goes on to say:
Like you and me, Mangum is in pursuit of the ultimate dividend stock -- the stock that will leave investors set for life. And having trailed his competition in recent years, Mangum is hungry -- and looking for a promising stock that the market's turned its back on.And just what is this stock? It is Bank of America (BAC). The above article notes several important facts about BAC:
- The entire financial sector is currently out of favor
- The company absolutely dominates U.S. retail banking
- It is currently paying a dividend of around 7%
- It has a solid balance sheet. BAC sold off its sub-prime business a while back, and credit appears under control
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It seems lately that the headlines are dominated by companies dropping their dividends such as Fifth Third (FITB) from $0.44 to $0.15, KeyCorp's (KEY) Board expressed its intention to reduce its dividend 50% to an annualized dividend of $0.75/share, FairPoint Communications (FRP) lowering their dividend 35% and Crystal River Capital (CRZ) cutting its dividend from $0.68 to $0.30. Not all the news is bad.
Consider the following companies that recently announced double-digit dividend increases:
Unfortunately, after running these companies through my [D4L-PreScreen.xls] model none of them warranted additional consideration. CAT was the closest with a NPV of MMA Differential of (621) .
On June 19, 2008, BB&T Corporation (BBT) stated that the company's capital levels remain strong and management anticipates "some increase in the cash dividend during 2008."
And finally, sometimes good news is found in maintaining the status quo. According to Bloomberg, Bank of America's (BAC) CEO told Oppenheimer analyst Meredith Whitney the company's dividend was safe. With an effective yield between 8% and 9%, and trading less than book value, BAC could end up as one of the great steals of 2008. Time will tell.
At the time of this writing, I owned BAC and BBT.
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It is good to periodically take a look at your holdings and the various sectors that you are invested in. My single largest sector is financials. It currently makes up 11% of my total investment portfolio. I like to limit any individual sector to 10%, thus I am slightly over-allocated. I am currently invested in six banks. I will be very surprised if I can make the same statement on December 31, 2008. Then again, I have been surprised several times over the last 18 months. At time of this writing, I owned BAC, BBT, MTB, RY, STI and USB.
Bank stocks make up a significant piece of my financials. For most of the year I held these banking stocks:Bank of America Corporation (BAC) -20.9%
The percentages above represent my year-to-date return (through 6/4/2008) for the period I held the stock. Not a pretty picture, for the most part. USB has been the lone bright spot.
BB&T Corporation (BBT) -2.5%
M&T Bank Corporation (MTB) +3.7%
Royal Bank of Canada (RY) -0.9%
SunTrust Banks, Inc. (STI) -20.1%
U.S. Bancorp (USB) +7.9%
Wachovia Corporation (WB) -30.7% -Sold 4/15/2008
In my article "Time is My Friend", I noted that I have too many bank stocks at six (seven with WB in my IRA). It was my desire reduce my bank holdings down to three to four stocks. Later the same month in my "State of the Dividend Address", I identified STI and MTB as my two weakest banks and moved them to "On The Shelf". I opted to wait and let the weakest bank stocks identify themselves over time before selling.
Fast forward to about a month and WB cuts its dividend. As per my policy, I immediately sell the stock. One down. Recently, MTB chose to leave its dividend flat at $0.70 and placed one foot in the grave. In an earlier stock analysis of BAC, I speculated it too would hold its dividend flat in September. As for the others:
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A yield curve is the relationship between yield and maturity. In a "normal" yield curve yields rise as maturity lengthens. When yields drop as the term lengthens, it is referred to as an inverted yield curve. A Yield On Cost (current dividend/basis) curve, like a yield curve, should increase as you move forward in time.
Normally, as dividend stocks' share price and dividends rise over time, the yield on their initial cost should also rise. However, when there are declines in share price, dividends or both, the yield on cost will also decline creating an inverted yield on cost.
Unfortunately, for my most of my income holdings and my income portfolio as a whole, yield on cost is inverted. Of the 35 securities currently in my income portfolio, only 11 of them are not inverted. Since my core rule is to sell a stock when it drops its dividend, all the inversion is coming from declining price. Stocks with an inverted yield resulting from a price decline would include these:
Of the 11 equities that are not inverted, some of this is due to a long holding period. Put another way, I bought them so long ago that the combination of share price appreciation and increased dividends more than offsets the recent downturn. Two in this category would be (current yields as of 8/29/08):
Securities held for a short period of time easily swing into and out of an inverted position. I don't put too much emphasis on a security's yield on cost until it has been in my portfolio for a minimum of one year and has at least one dividend increase. Two in this category would be (current yields as of 8/29/08):
An inverted yield on cost is not always bad thing. It can sometimes indicate a bargain price, but it can also indicate a company with some serious problems. As always, a detailed analysis needs to be performed before you decide the reason for the inversion.
All current yields listed above are as of 8/29/08.
Disclosure: Long in BAC, ACAS, HCP, NNN, PG and PEP.
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It is good to periodically review the make-up of your portfolio and determine if it is meeting your expectations and is properly allocated. I've determined that I have too many bank stocks. There are currently six, in my dividend portfolio. If I want to limit my dividend stock portfolio to 25 equities, six bank stocks are too many. Three to four banks are appropriate for my portfolio. I have decided the weakest of the six must go. So who will be asked to leave. Let's compare based on March 6, 2008 closing data:
| Description | BAC | BBT | MTB | RY | STI | USB |
| NPV MMA Diff. | 98,490 | 28,293 | 34,311 | 304,230 | 8,812 | 76,113 |
| Yield | 6.82% | 5.91% | 3.56% | 4.18% | 5.46% | 5.35% |
| Div. Growth | 12.4% | 9.5% | 15.6% | 20.0% | 5.5% | 14.1% |
| (Disc.)/Prem. | -15.9% | -17.8% | -20.2 | -17.2 | -2.9% | -4.2% |
| Stars | 4 | 5 | 5 | 5 | 2 | 4 |
STI may seem like a logical choice for dropping due to its low rating. However, the low rating is due to its most recently announced dividend increase to $0.77/share, which lowered its growth rate to 5.5% from 10%. I suspect most of the other banks will significantly lower their growth rate. Let's consider what happens if the dividend growth rate drops to 5%, and 10% for those above 10%:
BAC:
- Dropping the dividend growth rate to 10% drops the NPV MMA Diff. to $47,993
- Dropping the dividend growth rate to 5% drops the NPV MMA Diff. to $14,803
BBT:
- Dropping the dividend growth rate to 5% drops the NPV MMA Diff. to $9,963
MTB:
- Dropping the dividend growth rate to 10% drops the NPV MMA Diff. to $7,395
- Dropping the dividend growth rate to 5% drops the NPV MMA Diff. to $835
RY:
- Dropping the dividend growth rate to 10% drops the NPV MMA Diff. to $12,104
- Dropping the dividend growth rate to 5% drops the NPV MMA Diff. to $2,853
USB:
- Dropping the dividend growth rate to 10% drops the NPV MMA Diff. to $12,104
- Dropping the dividend growth rate to 5% drops the NPV MMA Diff. to $2,853
Based on the above, it appears that STI and MTB are the weak links. However, when I reviewed the cash flow statements MTB and STI's were the strongest. At the beginning of this week and this post, I had full intentions of selling a bank stock. But after this limited review, I have opted to wait. I am confident that one will slip and fall behind the others, and when it does I will ponce on it like a lion and cast it from my portfolio. Sometimes the best move is no move at all. In time the appropriate stocks to divest will begin to reveal themselves. Time is my friend.
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The big news this week has been Bank of America's (BAC) dividend cut and the continued financial meltdown. On Wednesday, Merrill Lynch lowered their 2008 profit forecast on General Electric Co. (GE) to $1.96 and cut its price target to $23. Murmurings on the street are that GE could join BAC and cut its dividend, which is currently over 5% - high by historical standards.
Even when the sky appears to be at its darkest, there are those still stand tall! Albeit, their numbers are not what we have seen in past weeks, but here are a few select companies that recently raised their cash dividends:
After running these companies through my D4L-PreScreen.xls model, TK with a NPV of MMA Differential of $32,960 and a dividend yield of 5.60% could warrant an additional look.
Yesterday, I reviewed United Technologies Corp (UTX) and it earned a 4 Star-Buy rating. This review was performed prior to the dividend increase. The increase will only strengthen the rating. As part of the announcement, CEO Louis Chenevert said:"In today's tough economic environment, UTX's balanced portfolio, global footprint, and seasoned executive team continue to deliver solid results. This dividend increase, consistent with our pattern over many years, reflects our confidence in sustained earnings growth. UTC's liquidity and free cash flow remain strong."
None of the others achieved the necessary NPV of MMA Differential to justify a full evaluation.
Disclosure: Long GE.
(Photo: Steve Woods)
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I. Change In Business Conditions
An abrupt or permanent shift in a company's business model as a result of business conditions could lead to a dividend cut. Over the last 18 months or so, virtually all businesses have experienced an adverse change in business conditions. However, the pertinent question is to what degree?Consider Gannett Co. (GCI) who publishes 90 daily U.S. newspapers, nearly 1,000 non-daily publications in the U.S., and close to 300 U.K. titles. With the mass adoption of the internet, traditional news outlets such as newspapers are experiencing a slow death. GCI cut its dividend earlier this year after several years of declining earnings.
Pfizer's (PFE) recent dividend cut would fall in this category. After years of unsuccessful attempts to get approval of a "blockbuster" drug, the cash rich company sought a merger partner with a good drug pipeline. In anticipation of it proposed combination with Wyeth, PFE cut its dividend.
II. Dividend Yield Above Historic and Industry Norms
A dividend yield that is higher than average and/or higher than others in the industry are indications, not all is well with the company. The market is adjusting to compensate for the higher risk of holding the company. When dividend yields start creeping up, it is time to start evaluating if the company can continue to pay its dividend.Consider Bank of America Corp. (BAC). Between 2000 and 2007 the company's dividend yield hovered in the 3%-4% range. In 2008, the dividend yield ranged from around 5% to the teens prior to its dividend cut. The same situation occurred with General Electric (GE) over the same period. GE's dividend yield from 2000-2007 normally were in the range of 1.5%-3.5%. However, in 2008 they the dividend yield than doubled as investors lost confidence in the company. Eventually, BAC and GE cut their dividends.
III. Diminishing Cash Available to Pay Dividends
Ultimately, the ability of a company to pay its dividend is determined by its cash position - both cash on its balance sheet and its ability to generate cash flow. All the companies above had one thing in common - a deterioration of cash flow available for paying dividends.After GCI's free cash flow peaked in 2004 at $1.3 billion, it slipped over the next four years to $852 million in 2008. Though GE's free cash flow was increasing, the company was taking on significant debt. GE's debt increased from $201 billion in 2000 to $524 billion in 2008 and it could no longer afford its dividend.
A Look Ahead
Unfortunately, there will be more dividend cuts in the coming days. Two companies currently on my radar are Nucor Corp. (NUE) and Caterpillar Inc. (CAT).On March 17th, NUE warned of a first quarter loss as the slumping economy sapped demand for the metal forcing it to cut output. "The economy has fallen off a cliff -- and there is no visibility as to the timing of the recovery," Nucor Chairman, Chief Executive and President Dan DiMicco said in a statement. NUE's free cash flows through 2008 had been strong and it ended 2008 with $920 million net debt (debt less cash) vs. $879 million in 2007. NUE is ok for now, but I look forward to reading their Q1 earnings release.
Last week CAT announced that its global machinery sales fell 27 percent in February, the third straight month of declines as the economic downturn has eroded demand for heavy equipment. In a separate announcement the company said it had notified an additional 2,454 workers in three states that they were losing their jobs as the company continues to try to bring production in line with plummeting demand. CAT's financial position is not as strong as NUE. Its free cash flow in 2008 was less than half of 2007 and it ended 2008 with no cash and $33 billion in debt vs. $27 billion net debt in 2007. This is another quarterly earnings release that I look forward to reading.
The above three items will help you determine which companies are at risk of cutting their dividends. Cash is king, so pay special attention to free cash flows and debt levels.
Full Disclosure: Long CAT and NUE.
(Photo Credit)
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