December 7, 2011
Tuesday, after the market closed, First Niagara Financial announced that they will issue $450 million of new common stock plus an additional $350 million of preferred stock and $300 million of bonds, to finance the acquisition of branches from HSBC. The additional shares represent nearly 20% more than are currently outstanding.
On top of that additional billion-plus of capital, First Niagara announced that they will cut their cash dividend to shareholders by 50%, bringing to a halt a many-years-long string of dividend increases (most recently in the 1st quarter of this year) and dropping the cash payout to the level of 2004.
This is a disappointing development from a company that has been attractive primarily for its cash dividend. Management had implied that earnings should top $1.00/share in 2012, which should have been plenty to cover an annual dividend of $.64. In last night's release, they state that the dividend cut will "preserve...$110 million of First Niagara's capital during 2012." That statement itself is instructive; I wonder if the Board realizes that the capital belongs to the shareholders, who will now do without $110 million during 2012. Never mind that the bank is raising 10 times as much capital through their securities offerings. If the HSBC branch buy needs that much capital, it begs a question: is management growing merely for the sake of growth? After all, I didn't read anything in the press release about reducing the comp for senior management.
The other question is: what should shareholders do now? There is not one answer, though it helps to consider practical matters: if you own the shares primarily for income, I would be a seller. That dividend is not likely to come back anytime soon, and there are decent income replacements that offer some upside. It appears that First Niagara paid top dollar for the HSBC branches and with the dilution of the new stock issuance growth may be a way off for the stock. Which brings us to growth or total return investors. There is always the chance I am wrong, and growth will be a near-term prospect for the shares. But with net interest margins depressed, loan growth sluggish, and all that dilution, growth may be something a shareholder could wait for years (and years) to see. And now with a much lower dividend, you'll get paid only half as much to wait.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).