The last few months have not exactly been kind to bank stocks. Sub-prime mortgage losses have hammered banks that made such loans, and even brought down banks with no direct exposure. Analyst downgrades and investor pessimism have been the rule.
While the past week has brought a small reprieve with rumors of another Fed rate cut on the way, many banks are still hovering near their 52 week (or longer) lows. While analysts are mostly saying “sell” or “hold”, I am looking to buy.
Why?
In a word - dividends. Banks tend to have high dividends, and plunging stock prices have pushed yields to almost ridiculous levels. Citigroup is currently yielding over 6%. Bank of America - 5.6%, Wachovia - 5.8%, US Bank - 4.8%, Key Corp - 5.7%.
Slightly smaller; National City - 8.3%, Huntington Bank - 6.5%, or if you feel brave, Washington Mutual currently is yielding 11.7% with most people betting that the dividend will be cut next quarter.
With large established banks like this paying 6-8%, it really is a tempting situation. Of course, as with any stock, the price can continue to go down, particularly if more losses show up at that bank. But on the other hand, with prices so far depressed compared to historic levels and the risk of total default so low (do you really think Citigroup will fail?) the upside just in terms of income seems pretty solid. There is also risk of dividends being cut (like WaMu is widely expected to do), but companies generally avoid this if possible, because it is a big signal of financial weakness.
Bottom line: do your homework, but as an income play, banks are worth a look!
Disclaimer: I am not a financial advisor, and I don’t recommend any particular stocks or investment strategy. The above is just my own thoughts and speculation.
Edit 12/11/07: And as expected Washington Mutual has slashed its dividend (by 70%!) Cross that one off the list…
