BofA CEO still sees economy turning in '09, and no need for a dividend cut, but 'all bets are off' if jobless rate surges

Here it is again, on the record: Bank of America Corp. CEO Ken Lewis doesn’t expect the bank to need to raise more capital or to cut the dividend on its stock, two moves many of its struggling rivals have been forced to make.

But in an interview in L.A. on Wednesday, Lewis acknowledged that his views on BofA’s ability to weather this economic storm depended on how many Americans are able to hold on to their jobs.

And he didn’t offer any near-term encouragement about the home-foreclosure situation, or about rising losses on the bank’s credit-card and home-equity-loan portfolios.

Lewis, 61, was in L.A. to give a speech ("Mending Our Mortgage Markets") to Town Hall Los Angeles and to visit the Countrywide Financial operations in Calabasas, nine days after Charlotte, N.C.-based BofA acquired the troubled mortgage giant. He also met with Times reporters and editors.

Some excerpts from the interview:

--On the bank’s capital situation and its dividend payment (now $2.56 a share at an annual rate): "I’ll restate what I said two or three weeks ago. Given our view of things, we do not expect to cut the dividend nor do we expect to have to raise capital.

"We get investors and analysts calling us saying, ‘You’ve got to cut your dividend because the market is saying you should cut your dividend.’ We’ve reminded them that the market over the short-term is not always right."

At Wednesday’s closing stock price of $22.06, BofA’s annualized dividend yield was 11.6% -- far above the yields on most other big bank stocks.

--On the outlook for home foreclosures and repossessions: "We make projections but I can’t tell you that we feel like we’ve got our hands around it at this point."

Like other lenders, he figures much will depend on where, and when, home prices bottom. "We think nationwide that we’ve got another 15% housing decline, and we think it will probably go into at least the first quarter of next year."

In California, Florida and other previously red-hot markets, BofA expects a 20% additional price decline, on average, Lewis said.

--On growing losses on credit cards and home-equity loans: Credit card delinquencies have risen but "those still are within our ability to predict. We’ve done a good job of saying, 'Here’s about what we think they’ll be next month,' and they’ve been right in that area.

"That is not so with home equity. Home equity [loan] deterioration has been much more rapid than we predicted. Our portfolio has a lower loss rate than most but the rate of increase has been pretty substantial. And the severity of loss is much higher than in any other period because of the dramatic house price declines. You’re going from a secured product to an unsecured product."

Note here, Lewis is talking about BofA’s home-equity loan portfolio, not Countrywide’s.

--On the outlook for U.S. consumer spending: "I do think there’s going to have to be a retrenchment. The financial system is going to force that. Because you’re not going to get the same loans or the same terms you did before.

"To the extent that that retrenchment then causes a kind of a domino effect and therefore unemployment starts to rise higher than we think, then you’ve created a situation that is really ugly.

"If you can see unemployment levels peaking at 6% [compared with the current 5.5%] then I think we’re OK" in expecting the economy to begin reviving in mid-2009, he said.

If unemployment rises "substantially" above 6%, Lewis said, then "all bets are off."

Photo: BofA CEO Ken Lewis. Lawrence K. Ho/Los Angeles Times

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."

As BofA stock sinks, CEO again defends Countrywide deal

What about the other Ken in Charlotte?

After Wachovia Corp.'s board today ousted CEO Ken Thompson from the bank's helm, some on Wall Street turned their attention to Wachovia’s arch-rival in Charlotte: Bank of America Corp.

BofA CEO Ken Lewis is battling skeptics who worry that his agreement this year to buy Calabasas-based mortgage lender Countrywide Financial Corp. could be as ill-fated as Wachovia’s deal for Golden West Financial, another mortgage titan, in 2006.

BofA shares have fallen for four straight months and lost 1.3% today to close at $33.58, a five-year low. The stock's annualized dividend yield now is a lofty 7.6%, a sure sign that the market believes the payout will be reduced. Wachovia's 41% dividend cut in April was one of the factors building up to Thompson’s removal.

I wrote here on May 22 about some of the issues dogging BofA, including doubts about the Countrywide purchase given the continuing surge in mortgage delinquencies. On a lengthy conference call with analysts today, Lewis again defended the stock-swap deal, announced in January.

As for the timing of the deal, "It certainly would be hard to make the case that it is the top of the market, but obviously you wonder -- the concern would be that you've still got dramatic ways to go before you get to the bottom," Lewis said. "We did not, at the time we announced the deal, think that the market had bottomed in terms of housing. We expected further deterioration, as has happened.

"Secondly, we've been told consistently even by the regulators that people think they’re very good operators," Lewis said, referring to Countrywide. "They know what they are doing. Now, they blew it on the credit side, obviously, but that wasn’t the operators' problems. That was the orders they were given."

The orders they were given? Wonder what Countrywide founder Angelo Mozilo would say about that?

Back to Lewis: If BofA is "in the ballpark" on the true value of Countrywide’s loan portfolio, he said, "this could be a very compelling financial transaction."

Obviously, Ken Thompson picked the market peak to swallow Golden West. Ken Lewis bought Countrywide in a fire sale. But even in a fire sale, you can’t always be sure you got a bargain until well after the fact.

Photo: BofA CEO Ken Lewis. Lawrence K. Ho/Los Angeles Times

Bank of America's Lewis says dividend is OK -- for now

Despite a dismal first-quarter earnings report today, Bank of America Corp. offered shareholders at least one good reason to hang on to their stock: CEO Ken Lewis suggested the bank sees no need to cut its dividend payout.

While rivals including Citigroup Inc., Wachovia Corp., Washington Mutual Inc., National City Corp. and others have slashed their dividends this year to conserve capital, Lewis, pictured, told investors on the bank’s earnings conference call that "we have not changed our philosophy about the dividend."

How good a guarantee is that? Don't count those checks before they actually land in your mailbox, because Lewis quickly added this caveat about the payout: "If the economy worsens dramatically from our outlook over the next few quarters, resulting in a prolonged recessionary environment, we would do what we think prudent to manage capital."

Still, Lewis’ relative optimism about the dividend may have helped support the stock price today in the face of the bank’s 77% plunge in first-quarter profit. B of A shares ended down 95 cents, or 2.5%, at $37.61. By contrast, the market hacked 8.1% off Wachovia’s share price on April 14 when it announced a 41% dividend cut and new stock sales to raise capital.

B of A’s annual dividend payout is $2.56 a share. That gives the stock a lofty yield of 6.8% at today’s closing stock price -- a sign the market has substantial doubts the payout will be sustained. The average yield of the 24 major banks in the BKX stock index is 5.4%.

Moody's Investors Service has doubts, too: The credit-rating firm today downgraded B of A's long-term senior debt to Aa2 from Aa1, in part citing the company's dividend outlays, which it labeled a "heavy burden."

Photo: Gary Friedman/Los Angeles Times

Posted April 21, 2008

A good call, a rough start and a numbers junkie's dream site

A few items of note from around the markets:

-- Kudos to Oppenheimer & Co. analyst Meredith Whitney, who was clear as glass in her warning on March 28 that Wachovia Corp. would slash its dividend this month amid worsening loan losses. Investors who weren’t paying attention -- or who still believed the dividend was safe -- shelled out as much as $29.97 a share for Wachovia the first week of April. The closing price Monday, after Wachovia hacked its payout 41%: $25.55, down $2.26.

-- Wachovia’s dividend cut probably produced more pain for shareholders of the Dodge & Cox Stock mutual fund in San Francisco, which counted Wachovia as its fourth-largest holding as of Dec. 31, at 3.3% of assets. Data for March 31 aren’t available yet, but Dodge & Cox tends to be a long-term investor.

The $55-billion fund, a star performer for much of this decade, hit a wall in 2007. It eked out a mere 0.1% gain for the year as large holdings including Comcast Corp., Time Warner Inc., Pfizer Inc. -- and Wachovia -- slumped. The value-oriented fund is off to another poor start this year, down 11.9% (including a 0.8% drop on Monday), compared with a 9% drop for the Standard & Poor’s 500 index.

-- Baywatch it isn’t: With annual-meeting season approaching the AFL-CIO has launched the 2008 version of its "executive paywatch" website, which as you might guess is not aimed at congratulating CEOs on their well-earned compensation last year. Anyone who enjoys looking at numbers with lots of digits to the left of the decimal point will find a gold mine here.

Wachovia's woes: "California really is that bad"

Wachovia Corp.’s shareholders must be wishing they could have a "do over" of the bank’s major foray into California: its 2006 purchase of Golden West Financial, the California lender that specialized in so-called option ARMs.

With mortgage loan losses soaring, Wachovia today slashed its quarterly dividend payment 41%, from 64 cents a share to 37.5 cents. The Charlotte, N.C.-based bank also said it raised $7 billion in fresh capital via common and preferred-stock sales to unnamed investors. The stock sales will help shore up the company’s finances, but the move dilutes the stakes of current shareholders.

Not surprisingly, the stock is getting hammered, trading down more than 10% to about $25 with 15 minutes to go in the session. The shares are near their lowest level since 2000.

Golden West’s option adjustable-rate mortgages allow borrowers to pick their own payment plan. The lender, under S&L industry legends Herb and Marion Sandler, was a pioneer in option ARMs via its World Savings unit. Although critics said the loans were dangerous from the get-go, Golden West had a reputation for tougher underwriting standards than its rivals.

But the standards evidently weren't tough enough for this real estate crash: Wachovia today said it lost $393 million in the first quarter after setting aside $2.8 billion for potential loan losses. The provision "largely reflected more severe deterioration in the residential housing market, particularly in specific markets in California and Florida," the bank said.

A headline on a Goldman Sachs & Co. report today on Wachovia put it succinctly: "California really is that bad. Golden West riskier than we thought."

The report, by analyst Brian Foran, said the Golden West loan portfolio was being squeezed by the "unprecedented period of stress" in the California real estate market.

Photo: Jim R. Bounds/Bloomberg News

More shareholders getting stiffed on dividends

Here’s one measure of Corporate America’s fear level about the economy: The number of U.S. companies that raised dividend payments to shareholders plunged 24% in the first quarter from a year earlier.

And the number of companies cutting or omitting dividend payments surged.

For investors, this is the double-whammy: Your stock price is down and you have less chance of getting some extra cash paid to you via a dividend hike.

Standard & Poor’s, which tracks dividend trends at 7,000 U.S. companies, says it counted 475 dividend increases in the first quarter, the lowest for any January-March period since 2003 (when the Iraq war began) and down from 621 in the first quarter of 2007.

Howard Silverblatt, S&P’s chief dividend analyst in New York, says many companies may well have enough cash on the balance sheet to boost their dividends, but managements turned cautious nonetheless in the quarter amid the “uncertainty and volatility of the both the market and the economy.”

Or, he notes, companies may say they’re choosing to return cash to shareholders by buying back stock in the market rather than by paying a bigger dividend.

But whereas a stock buyback might help support your stock price, a dividend increase is actual cash in your pocket.

Silverblatt says he’s more concerned about the jump in the number of companies that slashed dividends in the first quarter or omitted them entirely. A total of 38 companies cut dividends in the three months, up nearly 200% from the 13 that did so in the first quarter of 2007.

And 45 companies last quarter stopped paying a dividend altogether, up from just six in the year-earlier quarter.

Not surprisingly, prominent on the list of dividend cutters or omitters in the first quarter were financial companies — including bond insurer Ambac Financial Group, Citigroup and Sovereign Bancorp.

One place to look for companies still in the mood to raise dividends: the energy sector. Oilfield services giant Schlumberger raised its annual dividend rate 20% in the quarter, to 84 cents a share. ConocoPhillips boosted its annual rate 15%, to $1.88 a share.

Bank stock dividends on the cutting board?

As if investors in bank stocks haven't suffered enough for management's miscues: Next up may be a rash of dividend cuts.

Analysts at brokerage Oppenheimer & Co. on Friday added to the renewed gloom about financial stocks with a report that predicted dividend cuts in April by Citigroup Inc., Wachovia Corp. "and likely others."

The report said several big banks "are dangerously approaching earnings levels that simply will not support such high relative" dividends.

Citigroup already has cut its dividend once because of mounting losses on mortgage-related debt. That cut, in January, reduced the annual payout to $1.28 a share from $2.16.

Wachovia’s annual dividend is $2.56 a share, which yields a whopping 9.8% at the stock’s closing price on Friday. That kind of stratospheric yield is a clear sign that many investors figure a cut is coming -- even though Wachovia Chief Executive G. Kennedy Thompson told analysts in January that the payout was safe.

The action in the stock on Friday suggested investors weren't buying Thompson's previous optimism: Wachovia shares sank $1.08, or 4%, to $25.99, barely above the seven-year closing low of $25.60 on March 17. Citigroup fell 96 cents, or 4.4%, to $20.83. Citi’s shares also reached their recent low on March 17, when they closed at $18.62.

If financial stocks are heading to new lows, they could threaten the turnaround in the stock market overall as well.

An index of 92 financial stocks in the Standard & Poor's 500 index rebounded 11.9% the week of March 17, after Bear Stearns Cos. averted collapse by agreeing to an emergency takeover by JPMorgan Chase & Co.

But the financial index plunged 7% last week to finish at 331.75. That left it just 5.8% above the five-year low of 313.62 it reached March 17.