The dividends are in danger for two banks, U.S.Bancorp (USB) and Wells Fargo (WFC), both are in Warren Buffett's Berkshire Hathaway (BRK-A) stock portfolio.
It’s official – the board of directors cut the quarterly dividends by 88% to $0.05/share. This follows recent dividend cuts from JP Morgan(JPM) and PNC Financial (PNC), which cut their quarterly dividends by 87% and 85% respectively in an effort to conserve cash.
US Bancorp CEO said the following: "The decision to reduce our quarterly dividend was thoughtfully considered and very difficult, given the importance of the dividend to our shareholders. It was, however, the right decision, as our industry continues to confront uncertainty in the financial markets and a weakening economy. It is important for our shareholders to know that we are not reducing the dividend and preserving capital from a position of weakness, but from a position of strength and a desire to continue to invest in and expand our business. We are benefiting from a flight to quality as we continue to lend, acquire deposits and grow our fee-based businesses. In addition, we are investing in our franchise and employees, positively impacting our customers and the communities we serve. A strong capital position is essential to manage, grow and prosper in this challenging environment. Our company's capital position is solid, evidenced by a Tier 1 capital ratio of 10.6 percent at December 31, 2008.”
The company also announced that it would be reinstating its dividends whenever the economic picture stabilizes. This decision would save the Minneapolis based bank approximately $2.6 billion dollars annually.
The move wasn’t surprising since USB couldn’t cover its previous payment of $0.425 for the last two quarters. In November, USB received $6.6 billion from TARP. In December the bank failed to increase its dividend to shareholders for the first time 37 years. The latest move lead US Bancorp losing its dividend aristocrat status. In my analysis of US Bancorp (USB) back in April 2008 i warned that the high dividend payout ratio is a warning sign that dividend growth might be less spectacular in the future.
I don’t own any USB stock but if I did, I would be a seller on this mornings open. One could never tell if the worst for financials is over. US Banks have collectively shown that if they find a way to avoid sharing profits with their shareholders, they would cut or suspend dividend payments. Once again the lesson learned for investors is to never chase high yielding stocks which do not have a good enough coverage of their current dividend payment. In addition to that, concentrating the majority of one’s dividend income portfolio in one or two sectors such as financials or utilities is a recipe for disaster.
Of all the major banks, Wells Fargo (WFC) is also rumored to be the next to cut its dividends. It fits the profile of a dividend cutter perfectly - it has already received billions in TARP money.
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