Banking gamble: That fat yield on Bank of America stock

Their merger with Bank of America Corp. now a done deal, Countrywide Financial Corp.’s shareholders won’t be getting much for turning in their stock in the next few days, as I’ve previously noted: BofA will swap just 0.1822 of a share for each Countrywide share.

But Countrywide's investors will enjoy a whopping dividend yield on whatever BofA stock they get and keep. That is, they’ll enjoy it if BofA doesn’t join the growing list of banks that are slashing their payouts to conserve capital.

BofA’s annual cash dividend now is $2.56 a share. At Wednesday’s closing stock price of $26.61, that gives the stock a yield of 9.6%.

There are a lot of high-yielding bank stocks out there, as investors have hammered down the shares amid rising loan losses. But very few are yielding as much as BofA. Which, of course, is the strongest warning from the market that it doesn’t believe the dividend will be sustained.

BofA CEO Ken Lewis has said in recent months that he expected to maintain the dividend at its current rate, but he has qualified that by saying he wouldn’t rule out a cut if the economy worsened significantly and the bank’s loan losses deepened. So that’s not much of a commitment.

One big unknown, of course, is how much Countrywide will cost BofA in additional loan losses and potential legal settlements.

Yet with BofA shares down 35% since Jan. 1, Lewis has good reason to want to keep the dividend where it is: Payout cuts have enraged shareholders at other banks this year and helped cost some CEOs their scalps. One prominent victim was Ken Thompson, who was CEO of BofA’s arch-rival, Wachovia Corp., before he was ousted earlier this month.

Lewis may be asked about the dividend once more when he comes to L.A. on July 9 to deliver a speech to Town Hall Los Angeles. The title of his planned address is timely enough, given the Countrywide takeover: Lewis will speak on "Mending Our Mortgage Markets."

Comments

[Barry Ritholtz]

My bet is they slice it pretty aggressively before the year is out.

When stocks that have gotten walloped have a big yield, they are often sucker plays . . .

[Karl K]

Far be it from me to challenge Barry...but I will.

The real issue is not the stock price today but rather if BAC has the cash flow to pay that dividend.

So, BAC needs about $3 billion of cash flow per quarter to cover the nut at the current level. Very doable. Remember from your accounting that write downs have the paradoxical effect of lowering cash requirements for financing because they lower liabilities and in fact ADD to cash flow. That's what happend last quarter with the $12 billion of write offs.

I'd say the chances are now 50-50 they cut.

[Craig P.]

In addition to the recent across the board downgrades of financials we now have Barron's featuring Louise Yamada warning that "the sectors rout is far from over" and predicting "that some big names could fall another 40% or 50%". Though not singling BAC out, she does target Citigroup (C) as possibly dropping to $10.00 before the worst is over. And of course since BAC's Lewis announced his semi-assurance re. the dividend...things have indeed deteriorated. All the financials are fair game to short without mercy. With the chatter about a likely dividend cut or dilution coming for BAC, plus the potential of an earnings miss and/or downward guidance upcoming...unless the Federal bailout is actually passed or Lewis steps up and definatively again assures investors that the BAC dividend is still secure, the shorting will continue; his silence is enough confirmation of some negative news in the wings.