Merrill Lynch & Co chief executive officer John Thain, battered by US$19 billion in losses, vowed last week to maintain the firm’s US$0.35 quarterly dividend. The options market doesn’t believe him.
“The market is pricing in a significant cut, roughly 50 percent or more,” said Steve Sosnick, who trades options at Interactive Brokers Group Inc, which handles a seventh of global equity options trading.
A reduction would be Merrill’s first since it went public in 1971 and represent another reversal for Thain, 53, who told analysts he had plenty of capital two weeks before last month’s record US$9.8 billion stock offering. The sale lifted the burden of quarterly payouts by boosting shares outstanding by half.
The company has paid US$0.35 a share since the first quarter of last year, when Merrill’s board raised it from US$0.25. The board reaffirmed the payment on July 30. Yet a reduction to US$0.18 for the fourth quarter is reflected in the market, Bloomberg data show. The data compare prices for different Merrill options and apply formulas commonly used by traders to reflect the probability and timing of dividend payments.
Merrill, the third-biggest US securities firm by market value, has the highest dividend yield among peers, at 5.5 percent. The yield moves inversely to the stock price, which has tumbled 52 percent this year to US$25.60.
Goldman Sachs Group Inc, the biggest US securities firm, pays a 0.9 percent dividend yield, while No. 2 Morgan Stanley pays 2.7 percent and No. 4 Lehman pays 4.4 percent.
Sanford Bernstein & Co analyst Brad Hintz estimated in an Aug. 6 report that Merrill should cut its dividend by 64 percent to about US$0.13, to free up US$1.5 billion of capital a year. Fox-Pitt Kelton analyst David Trone said in a report on Tuesday that Merrill may face more than US$5 billion of writedowns in the second half of this year and may need the extra capital as a buffer.
Thain said in an Aug. 4 interview that he didn’t plan to cut the dividend, in part because many Merrill employees own the stock. His board doesn’t need to declare a change in the fourth-quarter dividend until October.
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