Since the subprime mortgage market imploded, financial companies caught in the fallout have been raising capital in two major ways
- cutting dividends and issuing more shares. Both methods erode shareholder value; analysts believe the industry is poised for more.
"The market is now seeing a substantial increase in financial companies issuing common and convertible instruments in an effort to shore up liquidity," said Standard & Poor's senior index analyst Howard Silverblatt. "The additional financing gives them immediate breathing room, with the payback being longer term dilution."
Put plainly, their gain is your pain.
Just this past week, Fifth Third Bancorp Chief Executive Kevin Kabat needed a cash infusion of $2 billion to bail out his struggling regional bank, while KeyCorp CEO Henry Meyer needed $1.5 billion. Both will issue stock to boost their balance sheets.
Banks have raised more than $60 billion this year by selling common and preferred shares.
The issuance of new stock acts to dilute the value of current shareholders because profit gets split among more shares. It's like having the family over for a turkey dinner and at the last minute grandpa invites the neighbors, too. There'll be less for everybody.
Meanwhile, the regular stock dividends investors have counted on from banks are shrinking. Citigroup Inc., Wachovia Corp. and KeyCorp are among 16 U.S. banks that slashed dividends during the first six months of 2008
- that's more dividend trimming in the sector than the past five years combined.
The entire S&P 500 doled out $61.72 billion worth of dividends during the first quarter
- down from $67.09 billion during the fourth quarter of 2007.
Financial companies accounted for 12.35 percent of the first quarter dividends, a sharp decline from 22.3 percent during the fourth quarter and 28.68 percent during the third quarter.
And, with major banks set to report second-quarter earnings next month, investors will likely suffer through more write-downs. Already Citigroup Inc. Chief Financial Officer Gary Crittenden warned investors that the bank will take substantial charges in the second quarter, though they won't exceed the $6 billion that Citi recorded in the first quarter.