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?”
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