Can USB and WFC Maintain Their Current Dividends?
In November, USB received $6.6 billion from TARP. In December the bank failed to increase its dividend to shareholders for the first time 37 years, which could lead to it losing its dividend aristocrat status. Yesterday the Minneapolis based institution reported a steep drop in 4Qearnings for to $0.15/share. This brings the 2008 EPS to $1.62. This marks the second quarter in a row that the company didn’t cover its current payments to shareholders. US Bank had to set aside $1.27 billion during the quarter to cover bad loans, compared to a loan loss provision of just $225 million in the fourth quarter of 2007. Furthermore the company continues to see deterioration in several of its loan portfolios, with chargeoffs to total loans ratio increasing to 1.4% from 0.6%. Its nonperforming loans stood at $2.62 billion, of which $0.64 billion were from the two failed California banks it recently acquired.
Investors ran for the exits, sending the stock to the lowest level since 1995. With its current yield of over 11% however, most investors are expressing serious doubts about the sustainability of the current dividend payments. Check out my analysis of USB from this link.
Wells Fargo is another financial institution whose shareholders are experiencing a roller coaster ride in their portfolios. On Thursday, an analyst from Friedman, Billings, Ramsay said the financial giant will likely have to cut its dividend. The analyst reiterated that current dividend reduces tangible common equity $5.65B annually. It remains to be seen what problems did Wells Fargo inherit with its most recent Wachovia’s acquisition. WFC was one of the first companies to receive bailout funds from the Troubled Assets Relief Program. This dividend achiever has increased dividends for 20 consecutive years. The current dividend of $0.34/share is well covered by earnings for the first three quarters. Wells is scheduled to report 4Q earnings on January 28, which will provide a better guidance to credit losses and issues related to Wachovia’s acquisition.
Thursday, January 22, 2009
By Dividend Growth Investor
Full Disclosure: None