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HistoricalPEGuy (67.41)

Is it a "falling knife" if you get 7%?



December 18, 2007 – Comments (10) | RELATED TICKERS: WB.DL2 , STI , NCC.DL2

I struggle with one question these days....  Will banks lower their dividend?  Is the crunch hard enough to make bank stocks actually reduce the amount they pay to shareholders?  I would love some feedback if you have any.  Any income investor is probably salivating over these yields.  Its almost too good - plus the knowledge that this "credit crunch" can't last forever - bank stocks must go up at some point.   But when can you call the bottom?

The fundamental question for me is:  When you can lock down these dividends?  Let's take a look at just a handful of yields, as of today, shall we?

Citibank (C) = 7%

Wachovia (WB) = 6.4%

SunTrust (STI) = 4.5%

Washington Mutual (WM) = 14.4% (what?!?!?!)

US Bancorp (USB) = 5.1%

National City (NCC) = 9.4%

Key Corp (KEY) = 6.3%

Not many investors would pass WM up at a guarenteed 14.4% yeild.  I think its fair to say that WM is so deep in this mess, that they can't keep shelling out cash.  The dividend must change.  What about Key Corp?  National City --- are they really that bad off?  At 9.4%?  Oh boy, I want it.  But I just can't pull the trigger. 

So what's to predict here?  If you look back at the S&L loan scandal, so many banks came out of that pretty clear.  WM is essentially a loaner - I'd stay away.  However, the others aren't that bad.  This seems like an over-reaction to me.  I'm looking to catch this falling knife.  And if it cuts me, I'll be happy making 6-9% the whole time while I wait for the stock to recover.  History proves that bank stocks always recover.  They always recover.  That's right.  They always recover.  One more time?  Nah.  You get it.

-- HPEGuy


10 Comments – Post Your Own

#1) On December 18, 2007 at 3:02 AM, dwot (29.30) wrote:

You are already behind the times here...

I believe WM slashed their dividend to 15c, making the yield between 3 and 4% now.  I think I saw another dividend cut but I don't remember which.

 I have a friend that was hoping to see 1/3rd off a bank stock he was interested in, I think he lost interest in that plan.  With how this sub prime mess is working he lost interest, at least at that price.

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#2) On December 18, 2007 at 4:48 AM, tuffsledding (30.93) wrote:

The creative derivatives that have sprung up are a new dimension for the banking sector. The re-packaging of debt obligations has never before been attempted on this scale. Nobody quite knows how to value the assets at the moment. That is why applying historical data may get your hands bloody....

I expect the yields to be dropping pretty fast. What souds too good to be true usually is.



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#3) On December 18, 2007 at 10:15 AM, leohaas (29.83) wrote:

Maybe you should read this article about high-dividend paying stocks. At the time of writing, Thornburg Mortgage had a yield of 10.8%, and New Century a yield of 47.9%! We all know how that ended...

When considering a dividend-paying stock, you have to make sure that the dividend is sustainable. 

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#4) On December 18, 2007 at 2:52 PM, martynanasi (95.29) wrote:

Todays banks much like the saving and loans and the japanese banking crisis will have dividend cuts and difficulties with their capital in times like these. Firstly there is the loan writedowns which cut into the coffers of every major bank and why the fed is scrambling not only here but in the EU as well. Secondly when risk parameters have increased so does the loan loss reserves that banks need to maintain. In the good times over the last several years these were reduced and those reduction were added to provide capital for earnings growth. We now have the flip side of that so earning (profit) won't be able to cushion these writedowns as much on top of reducing the stock prices. That is also why you will see capital infusions and banks issuing more preferred equity and bonds inorder to avoid reducing their dividends...a big no no in the investment community. So some of the poorly capitalized banks you could see many further problems including dividend cuts, dilutive offers and possibly not maintaining there loan loss reserves which could lead to debt defaults at some point. All in all stay away from banks...they aren't undersold by a long shot...the risk reward is not there at the moment but I am not sure if they are really going to keep falling as fast as they have. Hope it helps

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#5) On December 18, 2007 at 3:19 PM, HistoricalPEGuy (67.41) wrote:

Thanks for the great responses.  Tuff, I think the old saying holds true - "What souds too good to be true usually is".


-- HPEGuy 

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#6) On December 18, 2007 at 5:13 PM, XMFCrocoStimpy (97.49) wrote:

History proves that bank stocks always recover.  They always recover.  That's right.  They always recover.  One more time?  Nah.  You get it.

I can't help but think "I'm immortal so far - I'll always be alive..."

Stimpy   :oP

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#7) On December 18, 2007 at 5:40 PM, StockSpreadsheet (65.68) wrote:

For the major banks, (Citigroup, Wells Fargo, B of A, etc.), then it is true that those bank stocks will probably always recover.  After all, they should be in the select "too big to fail" group.  The Fed will give them as much money as they need at zero or less interest rates just to keep them afloat, fearing what might happen if a big bank were allowed to go under due to its own stupidity.  (Can't have companies be punished for being stupid now can we?)  Just like the Fed bailed out Continental Illinois many years ago, came to the rescure of the people invested in LTCM and probably a hundred other examples, the Fed won't allow a Citigroup or a BofA to fail. 

On the flip side, just because it didn't fail doesn't mean it is in good shape.  Look at the Japanese banking experience.  None of them failed, but their stocks were depressed for years.   Therefore, investing in these stocks now might mean that it is dead money for years, until clarity returns to the markets, all the subprime stuff is written off, (or sold to some other sucker or maybe the Fed or some other government-funded entity), and the M&A market starts thriving again.  So given a long enough time horizon, you may not lose money, but you might have made a lot more money investing elsewhere.

Caveat emptor.


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#8) On December 18, 2007 at 6:22 PM, Imperial1964 (94.60) wrote:

I'm primarily an investor and not a speculator.  Thus, I don't invest in things I don't understand.

If you understand the risks associated with the assets and liabilities held by banks--both on the books and off the books--well enough to quantify the risks and put a value on their worth, you're a better analyst than the professionals.

Otherwise, holding a position in big banks is just betting on whether the rates of default (both mortgage and corporate) will rise more or less than people expect.

Remember, banks are counterparties in massive amounts of Credit Default Swaps, which I am not qualified to determine whether they have enough reserve capital to cover a significant rise in defaults.

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#9) On December 18, 2007 at 7:58 PM, dmcnic (67.17) wrote:

If you're interested in yield, why not consider the preferred stock recently issued by some of these companies?

 To my clever friend dwot who said "With how this sub prime mess is working he lost interest..."


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#10) On January 02, 2008 at 10:57 AM, HistoricalPEGuy (67.41) wrote:

Yup - its true....

Thanks for all the great comments

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