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Banking gamble: That fat yield on Bank of America stock

June 25, 2008 |  8:19 pm

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.

Richyields25 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."

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