10-year

10-Year Anniversary Promotion (20% off)

Join GuruFocus Premium Membership Now for Only $279/Year

The largest discount in the last 10 years

Save up to $500 on Global Membership.

Don't Miss It !

Free 7-day Trial
All Articles and Columns »

JPMorgan Chase Cut Dividend, Wells Fargo and US Bank Might Follow

February 24, 2009 | About:
Yesterday JPMorgan Chase (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 (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 (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 (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 (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.

About the author:

Dividend Growth Investor
Visit Dividend Growth Investor http://www.dividendgrowthinvestor.com

Visit Dividend Growth Investor's Website


Rating: 3.8/5 (8 votes)

Comments

kfh227
Kfh227 premium member - 5 years ago
It's interesting to remember that WEB admitted buying WFC in his personal account not so long ago (3-6 months ago)
pcollin2
Pcollin2 - 5 years ago
Why on earth is the Fed discouraging bank dividends when the MAIN problem in the current economic crisis is lack of private equity investment in the banking system. Obviously dividends need to be cut if earnings cannot justify the payout, but I think it is in the best interests of all parties and the economy at large that bank investors be rewarded as much as possible. This is the ONLY way that the Fed will be able to get their TARP money back, and banks will be able to increase their common equity reserves and be able to lend freely.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK