When I saw the announcement that Bank of America (BAC) would acquire Merrill Lynch, I was concerned about the combined company’s ability to sustain its dividend. Unfortunately, my concerns were validated with an after the market announcement that BAC would cut its dividend to $0.32/share, down from $0.64/share. Below are excepts from the news release:
The company also announced two initiatives to raise capital, targeting an 8 percent Tier 1 capital ratio. The company intends to sell common stock with a target of raising US$10 billion. In addition, the Board of Directors has declared a quarterly dividend on common stock of US$0.32 to be paid on December 26, 2008 to shareholders of record on December 5, 2008. Assuming the current number of issued and outstanding shares, the reduction from US$0.64 paid in recent quarters would add more than US$1.4 billion to capital each quarter.
“These are the most difficult times for financial institutions that I have experienced in my 39 years in banking,” said Kenneth D. Lewis, chairman and chief executive officer. “We believe it is prudent to raise capital to very substantial levels in this uncertain environment. Both economic and financial market conditions have changed significantly in the last two months. We were willing to operate at capital levels over the short-term that were good, but not at our targeted levels, given projections two months ago. We now believe it is important to be at or near our 8 percent Tier 1 capital ratio target given the recessionary conditions and outlook for still weaker economic performance which we expect to drive higher credit losses and depress earnings. We believe that achieving higher capital levels today will position our company to provide credit to those consumers and businesses that are attracted to our strength and stability.
BAC closed the day at $32.22 down $2.66 or 6.55%. At 7:00pm Central, BAC was down an additional $3.24 (10.06%) in after-hours trading.
My investment process requires me to sell a company if it cuts its dividend. My portfolio was over-weighted in banks and I knew ultimately it the weaker ones would reveal themselves, thus it would be those that I sold. BAC is the first shoe to drop. As I say each time this happens, “my portfolio just got stronger.”