Bank stocks: Are dividends a good idea?
— -- Q: A bank holding company, TIB Financial tibb, plans to pay a 1% stock dividend on Oct. 10. Is it a good idea for a bank to be paying a dividend rather than conserving resources to withstand more bad loans?
A: It wasn't long ago when investors would only buy stock in banks that paid dividends. Now, investors like you get nervous when they do.
Your skepticism makes complete sense. Just a year ago, the federal government stepped up and essentially backstopped the entire financial system. Since private investors lost faith in banks, fearing they were loaded with deadly levels of toxic loans, the government injected a massive amount of cash into the banks and other financial firms.
When the government gets involved, so do politics. Following several of the government's unprecedented steps to restore confidence in the system, most banks slashed the dividends they paid. Some cut dividends as a condition of taking federal help, and others did it to conserve capital. It just wouldn't look right to take government money with one hand and give cash to investors with the other hand.
TIB Financial is one of those who cut their dividends. For years, the company paid a quarterly dividend just shy of $1 a share. But on Sept. 4, 2009, TIB announced it would be paying a 1% stock dividend, as you can read here.
Remember that a 1% stock dividend does not mean the company will pay out cash, as you suggest. Instead, the company plans to pay out stock to investors equivalent to 1% of the company's shares outstanding. The company had 14.8 million shares outstanding as of July 31. That means the company plans to pay out roughly 148,000 shares to existing shareholders. Remember, though, paying out 148,000 shares, currently valued at $1.49 apiece or about $220,000, isn't the same as writing a check for $220,000. A stock dividend doesn't cost the company any cash.
So it won't determine whether TIB Financial has enough capital to withstand any bad loans on its books.
What does this mean for investors? If you own 100 shares of TIB, currently worth $1.49 a share or $149, you will receive an additional share of stock worth $1.49. If you own one share of TIB, worth $1.49, then you will receive a stock dividend worth 1.5 cents.
The stock dividend may appease investors and help save the company cash as it navigates this difficult period. But clearly investors will demand cash dividends again as soon as it appears the bank can afford them.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz