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Banks: Does the market smell dividend cuts? Add to ...

The dividend yields the Canadian banks are kicking off are either a sign of the bargain of the century, or an omen of impending doom for the dividends.

Amid another round of selling in financial stocks Friday, adding to Thursday's deep losses, the S&P/TSX financials group is showing an incredible dividend yield of 6.5 per cent. That's not the kind of number you expect to see from a sector of largely blue-chip stocks with a long history of stable and growing dividends.

Just check out some of the numbers. Bank of Montreal - whose stock is trading at its lowest levels in more than eight years - is yielding an astounding 9 per cent. CIBC's dividend yield is 8.6 per cent, Bank of Nova Scotia 6.4 per cent, Toronto-Dominion Bank 6.1 per cent. Even Royal Bank of Canada, the apparently healthiest member of the Big Five Canadian banks, is yielding 5.9 per cent.

Other non-bank financials are kicking off similar rich yields. Manulife Financial is at 6.2 per cent, Power Financial is at 6.3 per cent.

At such levels, it's hard not to conclude that the market is betting that financials are at risk of dividend cuts, as the pressures from the credit crisis and economic downturn further squeeze their bottom lines. Indeed, Genuity Capital banking analyst Mario Mendonca has crunched some numbers, and believes several bank stocks are already trading at levels that reflect a scenario of sharp slowdowns in their business that would precipitate dividend cuts - while a couple (CIBC, TD and National Bank, in particular) are priced well below where "fair value" would be even in this bearish scenario.

But Mr. Mendonca, in a research note Friday, said he doubts any of the banks are in danger of dividend cuts, "perhaps with the exception of BMO". He believes the banks "would sooner raise capital than cut dividends."

If he's right, then patient investors are staring at some stunningly attractive bank buys at current depressed market levels.

 

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