U.S. Bancorp cuts dividend by 88%

The era when big banks could be counted on for steady dividend checks has come to an abrupt end.

More than 120 banks and thrifts nationwide have slashed or suspended their dividend payments to shareholders over the past year, as they scramble for ways to shore up their capital amid heavy loan losses and write-downs on their investments.

While dividend reductions are to be expected in the current economy, the size and pace of the changes have caught many bank investors off guard. On Tuesday, shares of U.S. Bancorp tumbled 12.5 percent after it announced plans to slash its dividend 88 percent -- to 5 cents per common share -- to preserve an extra $2.6 billion in capital.

Today, bank dividend checks are falling about as fast as housing values. Swelling loan losses and dwindling capital cushions earlier this year forced the nation's two largest banks -- Citigroup of New York and Bank of America of Charlotte, N.C. -- to slash their dividends to just 1 cent. In 2008, financial companies axed dividends at a pace not seen in more than five decades, wiping away $37 billion in prospective payments to shareholders.

After U.S. Bancorp's cut Tuesday, investors have cast a wary eye over Wells Fargo. Despite posting a hefty loss in the fourth quarter, Wells Fargo is among the last of the nation's big banks not to reduce its dividend. Shares of the San Francisco-based bank fell 9.5 percent Tuesday.

"The relationship between banks and their shareholders has dramatically changed," said Derek Ferber, a research analyst at SNL Financial, a financial consulting and research firm in Charlottesville, Va. "Banks used to be viewed as stable stocks that paid hefty dividends. Now they're struggling to inspire confidence."

U.S. Bancorp's steep dividend cut Tuesday was greeted with some dismay because of the bank's history of stable, if unspectacular, profit and dividend growth. The bank has paid a dividend for 146 consecutive years, and has increased it for 36 years. Compared with the more complicated money-center banks, such as Citigroup or J.P. Morgan Chase, U.S. Bancorp was viewed as safe, solid and predictable.

Then, on Feb. 25, the Obama administration upped the stakes when it announced plans to begin "stess testing" the nation's 19 largest banks to determine whether they have enough capital on hand to withstand a further surge in loan losses.

The announcement unnerved investors and bankers alike, who are still unsure what parameters regulators will use to determine if they are well-capitalized. Banks that fail the stress tests will be forced to raise more money from private investors or the government. In either case, existing shareholders of major banks would see their stakes diluted.

In a conference call Tuesday with analysts, U.S. Bancorp Chief Executive Richard Davis said the bank's dividend reduction was not a response to the stress tests; nor, he said, was the bank told by regulators to reduce its dividend. Instead, the bank made the move in order to "preserve capital" and to accelerate its repayment of the $6.6 billion it received from the U.S. Treasury under its Troubled Asset Relief Program, or TARP, he said.

"Under normal circumstances, the underlying strength of our company would most likely have been enough to maintain the status quo," Davis said. He added that, "we in fact run our own stress-test scenarios and feel confident that our portfolios test well under this scrutiny by the regulators."

Analysts said U.S. Bancorp's dividend cut will give a significant boost to its tangible common equity, or TCE, which is a measure of the portion of a bank's assets that shareholders would own after subtracting debt and intangible assets such as goodwill. It isn't known whether regulators will be looking at TCE when conducting their tress tests, but speculation that they might has driven down many banks' stocks.

"The last thing [U.S. Bancorp] wants is to have capital crammed down their throats by the federal government," said Mark Henneman of St. Paul-based money management firm Mairs & Power, which owns U.S. Bancorp stock. "This [dividend cut] may be unpopular now, but it was the right thing to do."