The ever-shrinking bank dividends could start vanishing.
After drastic cuts over the last year or so, more large banking companies might have to suspend their dividends to raise capital to counter mounting losses.
"When you've got loan losses, you've got to come up with the money [to cover them] some way," said Ed Yardeni, the president of Yardeni Research Inc. "Paying out dividends just doesn't make any sense."
Most of the major banking firms have cut their dividend to a dime a share or less as the recession has deepened. But the fear of losing investors has made these firms reluctant to discard dividends completely. Also, keeping even a small one lets them tout a track record of cutting checks to shareholders through swings in the economy.
Of 50 largest U.S. banking companies that pay dividends to common shareholders, only two — Citigroup Inc. and Colonial BancGroup Inc. — have eliminated them, according to data from Bloomberg News and SNL Financial LP. Citi suspended its dividend in February in conjunction with its exchange offer with the federal government. Colonial suspended its dividend in October to save $77 million annually as it dealt another quarterly loss.
Among the others in the top 50, nine — Bank of America Corp., State Street Corp., Regions Financial Corp., Fifth Third Bancorp, KeyCorp, Marshall & Ilsley Corp., Huntington Bancshares Inc., Synovus Financial Corp. and CapitalSource Inc. — have whittled their dividends as far as they can, to a penny a share, according to Bloomberg.
Stephen Steinour, Huntington's chief executive officer, explained his company's rationale in an interview Wednesday.
"There are some institutional investors that must get a dividend. To avoid alienating those institutional investors, the penny works," he said. "You'll see a wide number of banks at a penny."
Huntington has "never talked about" dropping its dividend altogether, according to Steinour.
A handful of other large companies have kept slightly higher dividends. PNC Financial Services Group Inc. and SunTrust Banks Inc. currently pay a dime, while JPMorgan Chase & Co., U.S. Bancorp and Capital One Financial Corp. all pay a nickel.
Some market watchers say money-losing firms, especially those that have taken federal aid, should consider eliminating dividends out of fairness to taxpayers and investors. They said it does not make sense for unprofitable companies that are being propped up by the government to bleed any capital that they do not have to.
"I think that'd be a good idea," said William Fitzpatrick, an analyst with Optique Capital Management Inc. "I think it's irresponsible to pay a dividend when you are undercapitalized."
Still, shedding the dividend has serious downsides, so it is not surprising that so many bankers are sticking to a penny payout.
Though eliminating the dividend would enable a company to save money, doing so could actually hinder its ability to raise capital.
Many mutual and growth funds are prohibited from investing in stocks that do not pay a dividend, so any banking company that drops its dividend immediately loses a chunk of its investor base. Also, scrapping the common stock dividend makes it harder to attract investors for preferred shares. Most preferred issuances dictate that dividends on the securities will not be altered as long as there is a common stock dividend. Dropping the common dividend could spook potential preferred shareholders.
"If you get rid of the dividend, you erase a whole class of investors from investing in that stock," said Christopher Mutascio, an analyst with Stifel, Nicolaus & Co. If the company then needs to raise capital, "you are going to exclude certain investors."
Still, David Hendler, an analyst with CreditSights Inc., wrote in a research report issued this week that he expects stressed institutions to suspend even "nominal" dividends in the coming months.
Dividends could be dropped as part of exchange offers with junior debtholders, Hendler wrote, and bankers might table dividends if they are forced to exchange common shares for preferred stock held by the government under the Troubled Asset Relief Program.
Mark Fitzgibbon, director of research at Sandler O'Neill & Partners LP, said that more companies might not have a choice when it comes to keeping the dividend, particularly if they are on the brink of collapse or have flunked a stress test. The results for the 19 firms that underwent those tests are due today, and early reports suggest a majority will be required to raise capital.
"I think that if they get into dire financial straits, then they might need to do that, where literally every penny of capital counts," Fitzgibbon said.