When Will Bank of America (BAC) Cut Its Dividend?

Tom Hutchinson at the Motley Fool raises the right question about Bank of America (BAC). Can the struggling bank afford to maintain its generous 8.6% yield? Answer: No. Why? Because if you ever want to grow again, you can’t pay out every penny you earn.

Bank of America’s dividend is currently $2.56 per share, for an 8.6% yield. The 2008 consensus analyst estimate for the bank’s earnings is $2.66 per share. That means that to keep the dividend, the bank will have to pay out virtually everything it earns. Put another way, that’s nearly a 100% dividend payout ratio, compared with the bank’s historical payout ratio of 40% to 50%.

Bank of America admitted as much the other day, when it corrected Meredith Whitney’s assertion that its dividend was “safe.” So unless a miraculous change in the markets radically improves BAC’s earnings, the only question is “when?”

See Also: Bank of America: Meredith Whitney is Wrong–Our Dividend is NOT Safe

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