Which Financials May Slash Dividends Next? (WM, FMD, RWT, BAC, C, KEY, WB, SFI, CSE)

Yesterday’s announcement that Washington Mutual (NYSE: WM) about a dividend slash, layoffs, exit of sub-prime, and a capital raise was greeted with far less than joy.  24/7 Wall St. has already warned not to trust the "dividend safety net" after Fannie Mae’s (NYSE: FNM) recent dividend cut even though many banks were out saying they want to protect their dividends and that the dividends were safe in October and November.  Companies say one thing but frequently end up doing something else entirely different. 

First Marblehead recently slashed its dividend in half, and it was yielding roughly 6.2% before its dividend cut.  The Washington Mutual (NYSE: WM) dividend of 10% or more was far to big to trust, so we put together a list of other financial stocks with high stated dividends now that the shares are off so much from their highs.  We are not saying all of these will cut their dividends and we’d even expect to formally declare "our dividend is safe" in response.  But these are the higher yielding dividends from financial companies that 247WallSt.com thinks could be at risk if the environment continues:

Redwood Trust Inc. (NYSE: RWT) is a company whose dividend we could argue is at risk.   Its president is retiring next year (but staying on the board), it just paid out a special $2.00 dividend, declared its regular dividend of $0.75 and announced 5 million shares for a stock buyback plan all in early November.  But then early in December it sold $122 million of common stock to "fund investment activities."  It invests in real estate loans and asset-backed securities.  At $36.42, its 52-week trading range is $24.07 to $66.60.

Of the major money center and larger regional banks, there are many yields that are incredibly far ahead of treasury yields because of large drops in underlying share prices.  Keep in mind that many of these dividends can be and likely will be maintained, but if banks need to save cash and get their dividends temporarily down to a more realistic percentage then this is one alternative.  Here is a partial list: Citigroup (NYSE: C) 6.3%, Wachovia (NYSE: WB) 5.9%, Bank of America (NYSE: BAC) 5.6%, KeyCorp (NYSE: KEY) 5.8%

iStar Financial Inc. (NYSE: SFI) just last week declared its normal $0.87 quarterly dividend and that is north of a 10.6% yield to today’s $32.50 handle (year range $25.25 to $52.87). Capital Source (NYSE: CSE) has an even higher yield and it just recently completed the voting approvals for its $400+ million buyout of TierOne (NASDAQ: TONE).  Because that deal is still pending regulatory closing and with a 13% yield, we just have a hard time believing this can be maintained indefinitely.  At $18.78, its 52-week trading range is $14.05 to $28.55.

If you wonder why there are no brokerage firms listed here, it is because they are serial ‘under-dividend’ payers.  They may pay out $1 Billion or $2 Billion in year-end bonuses, but a 2% yield is actually high for the brokerage firm stocks.

The truth is that there are dozens more that could be under review as well, and we wanted to keep this list limited to a few of the larger companies out there in banking and lending that have ties to lending, mortgages, ABS, and CDO’s.  We do not expect that these will all cut their dividends.  But we also know that sectors tend to cut and act in unison and are often all lumped together for better and for worse.  The problems in these sectors are not merely isolated events.

With an FOMC decision to cut rates less than two hours away, we do not expect the financial stocks to trade normally as if there was nothing going on.

Jon C. Ogg
December 11, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.