Bank of America Corp.'s decision to spend roughly $1.87 billion to boost its stake in China Construction Bank may be an indication that the company's capital level is holding up and that it may not have to cut its dividend, some analysts said.
The $1.76 trillion-asset Charlotte company said Tuesday that it would exercise an option to buy 6 million shares of CCB stock by early next month, raising its stake in the Chinese bank to 10.75% from 8.2%. The transaction was tied to a June agreement that allowed B of A make its initial $3 billion investment for a 9% stake in China Construction Bank. B of A's stake fell after CCB issued more shares.
Nancy Bush at NAB Research LLC said in an interview Tuesday that she was "cheered" by Bank of America's move. It reinforces the idea "that they are not crippled and that there is more to life than just" its planned purchase of Countrywide Financial Corp. The latter deal is expected to close next quarter.
Gary Townsend, the president and chief executive of Hill-Townsend Capital LLC, also said that the CCB transaction shows that Bank of America still "has all kinds of cash."
Kenneth D. Lewis, Bank of America's chairman, president, and chief executive, said during the company's first-quarter earnings call on April 21 that B of A cannot monetize any of its CCB holdings until the fourth quarter. He said, however, that B of A was more apt to increase its stake and build ties to China before looking to sell any stock. Several analysts in recent months have questioned the sustainability of B of A's dividend, and the company has raised $19.7 billion in capital this year after taking several hits to quarterly earnings. However, Mr. Lewis said during the April earnings call that the dividend should be safe if no severe or lengthy recession occurs.
B of A spokesman Bob Stickler said Tuesday that CCB stock pays a dividend twice a year, though he would not say how much. B of A cannot derive any earnings benefit from the planned stock purchase until a lock-up period expires in August 2011, he said. "We're not going to get involved in speculation about" what the purchase might mean for B of A's dividend, Mr. Stickler added. "But we are comfortable with the capital levels that we have today."
