By Lynn Thomasson
July 16 (Bloomberg) -- Fannie Mae and Freddie Mac, the beleaguered U.S. mortgage-finance companies, may cut common stock dividends to preserve capital after their shares fell 80 percent this year, data compiled by Bloomberg show.
Freddie Mac will probably halt its 25-cents-a-share quarterly payment and Fannie Mae will likely eliminate dividends after more than $11 billion in combined losses since last year, according to Bloomberg dividend forecasts. Washington-based Fannie Mae has paid shareholders for three decades, while Freddie Mac, located in McLean, Virginia, increased its payout every year since 1990 before lowering the awards in November.
The government-sponsored companies tumbled yesterday in New York Stock Exchange composite trading as investors lost confidence in Treasury Secretary Henry Paulson's plan to shore up their finances. Moody's Investors Service reduced the lenders' financial strength ratings, saying credit losses may jeopardize dividend payments on preferred shares.
``I don't know how you can justify a taxpayer-led bailout and agree to pay dividends to stockholders,'' said Don Wordell, a fund manager at Ceredex Value Advisors, which manages $3 billion in Orlando, Florida. Fannie Mae and Freddie Mac ``need to be in capital preservation mode right now,'' he said.
Freddie Mac paid $1.55 billion in common and preferred dividends last year, according to the 2007 annual report. Fannie Mae's payouts totaled $2.48 billion.
Increasing Credit Losses
Fannie Mae dropped 27 percent yesterday, its biggest slump since at least July 1980, to close at $7.07 in New York, while Freddie Mac declined 26 percent to $5.26. Moody's reduced the company's so-called financial strength ratings, citing their limited ability to raise capital and the likelihood of increasing credit losses.
Fannie Mae rebounded 15 percent to $8.10 at 10 a.m. in New York, while Freddie Mac climbed 16 percent to $6.12.
Fannie Mae's share slump has pushed its dividend yield up to 12.3 percent, almost five times the 2.5 percent average of the companies in the Standard & Poor's 500 index. Freddie Mac's yield is 16.3 percent. The yield is the annualized gross dividend divided by the current market price.
No Bailout Needed
The White House and the Federal Reserve should give Fannie Mae and Freddie Mac assurance they will continue as for-profit firms with reasonable regulation, not a ``bailout,'' Franklin D. Raines, Fannie Mae's former chairman and chief executive officer, wrote in an opinion piece in the Washington Post today.
While the companies, which have the implicit backing of the U.S. government, kept their Aaa senior and subordinated debt ratings, Moody's cut the preferred stock to A1 from Aa3 and said all rankings are being reviewed for further downgrades.
Paulson sought to boost investor confidence July 13 when he said he will seek authority to buy equity stakes and increase the government's credit lines to the companies.
Fannie Mae and Freddie Mac are critical to the U.S. housing market because they provide financing to banks and mortgage lenders by purchasing mortgages and either keeping them or packaging them for sale to investors. The companies own or guarantee more than half the $12 trillion of U.S. home loans.
The lenders would join 21 other S&P 500 Index companies that cut payouts in 2008, according to S&P data. That's more than the past five years combined. General Motors Corp., the biggest U.S. automaker, suspended its dividend yesterday for the first time since 1922.
`Well Capitalized'
Fannie Mae spokeswoman Janis Smith declined to comment on the company's dividend plans.
``This is a well-capitalized company with strong liquidity and access to the world's capital markets,'' Freddie Mac spokeswoman Sharon McHale said. ``We're out there in the market day in and day out buying mortgages from our lenders.''
Citigroup Inc., Regions Financial Corp., KeyCorp and SunTrust Banks Inc. will probably reduce payouts 50 percent this year, according to the Bloomberg data, which analyzes net income, the ratio of debt to assets, earnings per share, credit ratings and option prices to help determine potential dividend changes. Banks are reducing expenses after the worst U.S. housing slump since the Great Depression left financial companies with writedowns and credit losses of more than $416 billion.
Fannie Mae and Freddie Mac would be barred from paying dividends under restrictions proposed by Representative Barney Frank should the mortgage companies tap an increased line of credit with the Treasury. Frank's comments yesterday reflected efforts by lawmakers to introduce conditions on Paulson's request for unlimited power to provide capital for the two companies.
`Last Things'
Fannie Mae raised its dividend until 2005, when the company was investigated for accounting errors. It declared a 25-cent dividend on May 6, down from 35 cents in April, after announcing plans to raise $6 billion because of a bigger-than-estimated first-quarter loss.
Freddie Mac reduced payments by half, to 25 cents, in November. The company said the cut would save $650 million annually and preserve capital depleted by growing losses from bad loans. Last week, Freddie Mac said it would consider reducing its dividend further.
``If you've increased your dividend for 10 years and then stop paying, you better hold up a sign that says liquidity problem,'' said Howard Silverblatt, senior index analyst at S&P in New York. ``Cutting a dividend is one of the last things you want to do, but we do expect more'' among financial institutions and consumer companies dependent on discretionary spending.
Shareholders face more risks because Freddie Mac may be forced to eliminate the dividend on its preferred shares, Moody's said yesterday. Owners of preferred equity are guaranteed a payout, unlike common stock. Fannie Mae probably won't miss any preferred stock payments, Moody's said.
To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.
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