Yesterday JPMorgan Chase (NYSE:JPM) cut its quarterly dividend by 87%, from $0.38 to $0.05. Chief Executive Jamie Dimon said the cut was a precaution to ensure that the company has financial flexibility if economic conditions worsen. The move will save the company about $5 billion annually.
Dimon said the dividend cut is not directly related to the Troubled Asset Relief Program, although it helps the company to maintain a strong capital position. JPMorgan, has received $25 billion in TARP money. JPMorgan has been deemed to be in the best financial shape of the other major banks.
The move is also supposed to save funds to repay the TARP money faster. JPMorgan Chase (NYSE:JPM) also reaffirmed that it would be willing to increase dividends once economic conditions are more favorable.
Investors are now wondering which bank is next to cut its dividends. Some believe that Wells Fargo and US Bank, which received $25 billion and $6.6 billion respectively, are next in line for a dividend cut. With its current yield of over 16% however, most investors are expressing serious doubts about the sustainability of the current dividend payments.
Wells Fargo (NYSE:WFC) is more likely to cut, as its acquisition of Wachovia would most certainly increase the need of the bank for cash. With a current yield of 12.5%, WFC seems like the lowest yielding financial stock out there. In the current tough credit environment however, I wouldn’t count on the safety of any financial dividend.
US Bank (NYSE:USB) might be more susceptible for a dividend cut, as its payout ratio is very high currently. Furthermore the bank failed to increase its dividend in December for the first time in over 3 decades. Other companies such as Bank of America (NYSE:BAC) failed to raise their dividends just months before cutting their payments to shareholders.
Traditionally, bank stocks were one of the best dividend investments for shareholders. It seems that TARP essentially is bad news for dividend investors, as it could result in further decreases to already lowered payments. The lesson to be learned for long-term investors is to diversify across sectors, no matter how great the dividend yields look.
Editor: Wells Fargo, US Bank, and a small position in Bank of America happen to be Warren Bufftt's bank holdings.
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