Tuesday, February 19, 2008
Dividend investors always look for the bits of dividend news that go unnoticed or underappreciated. This kind of news usually occurs on a day when hot news breaks on other subjects. Stocks faded yesterday as the price of oil rose to $100 per barrel, but there was a very important piece of dividend news that went largely unreported: Barclays Bank (BCS), the third largest bank in Britain, raised its dividend nearly 10%. This is important because Barclays, like so many of the world's large banks, has had to take write-offs of subprime loans. They did so again in yesterday's report, but overall their financial results were above expectations and the market reacted favorably with Barclays US ADRs rising nearly 9%. With a price rise of that magnitude, it may seem like the market moved right in step with the good news in Barclay's report, but I believe it missed something. In the report, Barclays forecast that earnings growth over the next 5 years would be in the 5%-10% range. For Barclays to raise their dividend 10%, which is at the high end of their stated target, signals to me that they are more confident about their near-term growth prospects and remaining exposure to the subprime situation than most investors are giving them credit for. A 10% dividend hike in a tough year reveals some real moxie on the part of Barclay's top management. It shows a commitment to their shareholders to keep the dividend growing at a reasonably steady pace in spite of the ups and downs of the banking business. This is something I wish more companies would do. I'm hoping Barclay's price has seen the bottom. If it has, a little more air will have been taken out of the winds of the subprime financial storm. The bottom of the subprime mess will come company by company, as each becomes more transparent and proves to investors that they are not irreparably damaged by the bad loans they made in the subprime area. Remember that write-offs are a very serious and damaging event for a bank, but they are a paper loss. No one knows what the real loss will be until the collateral is sold. A cash dividend is real money paid at a specific time in a specific amount; cash dividends are not subject to recall, nor can they be fudged for very long. Barclays' 10% dividend hike, in my judgment, is much more important than the write-off they took. Not in terms of money, but in terms of the message the company is sending regarding its future. Barclays is one of the world's most valuable banking franchises. Their 10% dividend hike is the kind of validation I look for in tough times that the company believes better times are near. If better times, are indeed near, Barclays should play. With the 10% dividend hike they now yield over 7%. That compares pretty favorably to the yield on the average stock of about 2%.