More Dividend Cuts On The Way

JPMorgan Chase & Co. (JPM) yesterday (Monday) announced a reduction in its quarterly dividend from 38 cents a share to 5 cents a share, in an effort to preserve capital. The dividend cut would enable the company save about $5 billion a year.

While JP Morgan has suffered tremendously due to the economic downturn, it is still in a much better position than many other big banks, like Citigroup (C) and Bank of America (BAC), which had to reduce their quarterly dividend to a penny after receiving a second round of bailout funds from the Government. (Unfortunately, the Treasury did not put any conditions on the first round of bailout funds regarding a dividend reduction.)

It was clarified by CEO Jamie Dimon that the dividend cut was not related to JPMorgan’s acceptance of funds from TARP, and rather it was a precautionary measure to strengthen the balance sheet. It is understood that the company was not actually in need for bailout funds but was “encouraged” by the Government to take it, and that the company is trying to repay the TARP funds as soon as possible.

As the economic conditions deteriorate further, housing prices continue their downslide and the unemployment rises sharply, the banks will face higher losses in their loan portfolios, especially in the mortgage, residential construction, commercial real estate and consumer loan portfolios. As such, preservation of capital to withstand future losses is a prudent action in the current environment.

While many other banks have also slashed their dividends in recent months, some such as BB&T (BBT) and Wells Fargo (WFC) still have very high dividend payout ratios. We expect to see more dividend cuts in the coming days as these companies realize the need to rebuild their capital levels in a very challenging operating environment.

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