Daily Dividend: BofA Dividend Denial May Be Immaterial (BAC, JPM, WFC, C, BRK-B)

It’s “The Daily Dividend.”  Bank of America Corporation (NYSE: BAC) is getting hit this morning on news that the Federal Reserve denied a request by the largest bank by deposits to increase its quarterly dividend to common shareholders.  The move comes on the heels of J.P. Morgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) being allowed to juice up their payouts to roughly 30% of their income being returned to shareholders.  Normally we might be extremely critical here, but the reality is that this move just does not amount to as much as the stock market reaction is telling you today.

When Citigroup Inc. (NYSE: C) said it was splitting its stock in a reverse split of 1-for-10 and announced that its post-split dividend was being initiated at $0.01 per share, Citi’s shares initially rose but that enthusiasm quickly waned as the yield is a token amount with less than a 0.1% yield. Today’s reaction at BofA is nearly a 3% drop at Bank of America but this may just be too much if you consider the big picture.

Bank of America is just not yet back in the same caliber as J.P. Morgan nor as Wells Fargo. There is a reason that Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-B) decided not to keep holding BofA and decided to continue his increase in Berkshire Hathaway’s massive holdings in Wells Fargo.  Buffett prefers dividends.

Bank of America is still in turnaround mode.  It is almost hard to imagine, but the bank is now talking about consolidating some of its branches after its two-decade pursuit of acquisitions.  The company is above the 10% deposit ceiling already so it cannot make new acquisitions that turn into banking deposits. 

The difference in the penny per share per quarter at Bank of America versus what will be the same at Citigroup is that the BofA yield comes to about 0.3% versus less than 0.1% for Citi. The second round of stress tests did not give regulators enough comfort to allow BofA to boost its payout.  Some of the talk may have been far too grandiose from CEO Brian Moynihan about the return to much higher earnings and dividends, particularly when we consider that ‘normalized’ conditions are still about 12 to 24 months out in his speech.

The risk of mortgage put-backs in at least a limited scope is also still present even if BofA’s Tier-1 capital was back to 8.6% at the end of 2010.  It is very possible that Bank of America just wanted too much of a dividend hike when it submitted its request to increase the payout. 

Thomson Reuters has estimates of $1.33 EPS for 2011 and $1.87 EPS for 2012.  On the surface, a $0.04 current dividend payout will do almost nothing to harm its earnings and capital rebuilding.  Much of the growth and improvement is likely to be back-end loaded and that may be a part of the issue.  After all, regulators will regulate based upon the conditions of today rather than a normalized earnings a year or more out. 

It seems as though Bank of America probably asked for too large of a dividend hike and perhaps wanted to buy back too much stock.  If the bank can live up to its plans then it will get approval in the second half to boost its dividend.  Most likely that will go to $0.04 or $0.05 per share per quarter if the bank can prove it is worthy.  A call for much higher of a dividend is still just too much and too soon.

BofA shares were down 3% at $13.48 and share traded as low as $13.37 today.  Its 52-week trading range is $10.91 to $19.86.  We have not considered BofA as one of the few “immediate dividend hikes” coming down the pipe.  It will likely be in the second wave of dividend hikes, but the bank is not currently believed to be in a position that it will be kept at bay until even the still-very-unhealthy banks get to lift their payouts.  If BofA was going to be allowed to suddenly ramp its payout, shares would have likely already been above $15.00 ahead of the event. 

JON C. OGG