Bank of America will cut dividend

First of all, let me apologize for the hiatus. Lets just say that there were things that required my full time attention. Several extraordinary development have taken place in past few days. In this post I am going to discuss the purchase of Merill Lynch by Bank of America and its fall out on the BAC shareholders.

First of all, gobbling up Merill Lynch in a time when hell froze over on the wall street goes out to show the confidence Ken Lewis has in his company. Merill Lynch will prove strategically very important for Bank of America. Ken Lewis has dabbled with investment banking several times without success. After having his share of fun in investment banking, Ken Lewis washed his hands of it. Merill Lynch gives him the best chance ever to succeed in that area. This chance however comes with a price tag of 50B dollars. People everywhere are saying that Ken paid too much for MER when he could have picked MER for less than half that money in a day or two. Only time will tell how this deal will work for BAC but in short term this deal may have grave consequences for the shareholders who rely on the income generated by the dividends.

This deal is an all share deal. This means that BAC will have to issue a lot of shares, namely 33% of current outstanding shares to close the deal. This means that the dividend liability will increase by 33%. The payout ratio for BAC is over 100% as it is and is going to increase 33%. With capital ratio dwindling BAC can not afford to pay out money in dividends that is considerably more than the earnings. Unless they increase their earnings significantly in next few quarters, its only a matter of time when BAC cuts the dividend.