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Thursday, June 12, 2008 11:24 AM

Dividend Cutting and Capital Raising Efforts Continue

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Cash strapped banks and brokers are slashing dividends. Bloomberg is reporting U.S. Financial Firms Cut Dividends Most in Five Years.

Citigroup Inc., Wachovia Corp. and KeyCorp are among 16 U.S. financial firms that slashed dividends this year, a tally that exceeds the previous five years combined. Goldman Sachs Group Inc. and Bank of America Corp. may follow as mortgage-related losses escalate, analysts say.

Banks are trying to hang onto capital as the U.S. home market implodes and loan losses soar. KeyCorp, Ohio's third- largest bank, chopped its payout in half today -- the first decrease in 43 years -- and said it must raise $1.5 billion after losing a tax case. The world's biggest financial companies have raised $291 billion to bolster their balance sheets.

Goldman and Bank of America are poised to announce ``dramatic'' dividend cuts, Deutsche Bank AG strategists Scott Weiner and Chris Hauck wrote in a June 10 report. Goldman, the world's biggest securities firm, may reduce its dividend by 26 cents to 9 cents, while Bank of America, the second-largest U.S. bank by assets, may cut its payout by the same amount, to 38 cents, the analysts said.

All or None?

Citigroup, the biggest U.S. bank, may lower its dividend by 23 cents, the same amount it did in January, to 9 cents, according to the report, which relied on an analysis of options trading and prices.

KeyCorp reduced its dividend by 50 percent to 75 cents a share annually so it can save $200 million a year. It had been yielding 9.6 percent, more than four times the average stock in the S&P 500. The Cleveland- based bank lost a tax case tied to accounting for leases that will trigger a charge of $1.1 billion to $1.2 billion.

Sovereign Bancorp posted a $1.3 billion loss for 2007 and eliminated its quarterly dividend in January. The lender raised a net $1.39 billion in capital selling shares and fixed-rate notes to act as a cushion should the economy keep slowing.

Washington Mutual's dividend cut, in April, came as the company said it would raise $7 billion from private investors led by TPG Inc. National City also raised $7 billion.

Bank of America pays a $2.56 annual dividend, representing a yield of 8.9 percent as of yesterday's close. The stock's 30 percent decline this year suggests skepticism among investors that the payout will be sustained. The lender said yesterday it may consider a dividend cut if the economy weakens.

Wachovia dropped 23 percent after the bank cut its dividend in April. SunTrust Banks Inc., which hasn't reduced its payout, fell 26 percent this year. The yield was 7.1 percent as of yesterday.

Citigroup cut its dividend 41 percent in January, the first reduction since the company's creation in a 1998 merger. The move allowed the bank to hold onto an additional $4.4 billion in capital each year. Citigroup recorded $42.9 billion in losses on real estate and was forced to raise $44.1 billion in fresh capital.
The next stage of capital raising has begun...

Minyanville professor Bennet Sedacca had these comments on the announcement.
I have been harping on this forever. First we saw preferred stock capital raises, then we saw hybrids. Then S&P said no more hybrids, y'all are full up.

Now Lehman (LEH) sells equity as if it will help. And now comes KeyCorp (KEY) cutting its dividend and raising equity. This is highly dilutive, entirely too late and a sign of desperation.

Minyans, this is important. It's the wave of the future. Anyone buying and upgrading these names doesn't understand the situation.

These companies are starved for capital and at some point, investors will say 'no mas'. I've been anticipating this and I think it's just the beginning.

Let the capital raises begin. Again.
Banks keep cutting dividends in steps. What they need to do is eliminate them. They will, including Citigroup.

Mike "Mish" Shedlock
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