Today’s “Daily Dividend Watch” is one with a bit more caution. Hudson City Bancorp (NASDAQ: HCBK) is one of those regional banks which we recently noted that already had a high dividend yield before the Federal Reserve recently told the larger money-center TARP banks which ones could and could not raise dividends. If you simply screened for high dividends in common stocks of banks, a yield of 6% might be extremely enticing. There is a problem… Hudson City is likely to see a dividend cut.
The company recently restructured its balance sheet with debt repayment and new offerings under an agreement with the Office of Thrift Supervision to lower its interest rate risks ahead. Many banks have thrived in this low-rate climate due to carrying costs and borrowing costs being extremely low, but the low rates and the tight lending standards have also played tricks on total portfolio returns elsewhere.
This is one more example of how higher rates should be at least braced for even if you are in the camp that rates can’t rise too high before killing the recovery. There are just other forces at work and rates could rise regardless of whether the recovery gets hampered or not.
A research call from Bank of America Merrill Lynch raising the rating to Neutral from Underperform was seen in light of this risk. The report noted that the dividend could still be cut by as much as half.
We have close to a 6% dividend yield today at Hudson City. Frankly, this is a flag. A bank paying that high of a dividend on its common stock is way off the market now. A 3% yield would still be higher than most of the money-center banks today. After looking through news reports on the web, other analysts are expecting a dividend cut at Hudson City as well.
AT $9.78, its 52-week trading range is $9.51 to $14.75. The bank’s current dividend of $0.60 per year (actually $0.15 per quarter) is just too high compared to Thomson Reuters consensus projections of $0.75 EPS for 2011 and $0.86 EPS for 2012. Its earnings came in at $1.09 EPS in 2010. On a GAAP basis, the company’s CEO said that the recent $644 million restructuring loss will effectively wipe out the full year’s profit for the bank.
The last three months have been very harsh for Hudson City Bancorp. Shares have fallen from north of $13.00 in January down to $11.00 in January, only to be followed at the end of February when shares fell from $11.50 to under $10.00 in short order. What is sad is that this was one of the banks deemed to be better off than many others during and after the recession. Now shares are challenging 5-year lows.
Beware when dividends look too good to be true. A 6% yield should never really be seen in common stocks of banks in most normalized environments. Investors usually have to go into trust preferred shares with lower implied volatility and much lower liquidity for yields like that.
JON C. OGG
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