TARP is bad for dividend investors

TARP allows the United States Department of the Treasury to purchase nonliquid, difficult to value assets from banks and other financial institutions. TARP also allow the Treasury to purchase whole loans and make direct equity investments in banks themselves. The targeted assets are securities backed by mortgages, sometimes described by the government, media, and others as “troubled” or “toxic” assets.
As of November 12, 2008, $290 billion of the first $350 billion allotment funding TARP has been allocated, primarily to the Capital Purchase Program: $250 billion for bank equity infusions, and $40 billion for an equity infusion into insurer American International Group.[
The eight financial companies that were the first to have received TARP funds include:

Bank of America (BAC) (analysis)
Bank of New York Mellon Corp
Citigroup (C )
Goldman Sachs (GS)
JPMorgan Chase (JPM)
Morgan Stanley (MS)
State Street (STT)
Wells Fargo (WFC)

There were 44 other institutions that received TARP money, including USB, CMA, Northern Trust, Suntrust Banks, KeyCorp, RF, BB&T and others. Check out my analysis of USBank or my analysis of BB&T.

There is some talk that a TARP funding to banks essentially marks the end of their dividends.

"Restrictions on Dividends:
For as long as any Senior Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Senior Preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Senior Preferred), nor may the QFI repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Senior
Preferred or common shares, unless (i) in the case of cumulative Senior Preferred all accrued and unpaid dividends for all past dividend periods on the Senior Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred the full dividend for the latest completed dividend period has been declared and paid in full.

Common dividends: The UST’s consent shall be required for any increase in common
dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties." Source TARP Capital Purchase Program

What really showed me that TARP program is serious, is a recent statement from State Street last week, which announced that it wasn’t going to raise its dividends in compliance with the restrictions on dividend rate increases generally imposed on all participants in the U.S. Treasury's TARP Capital Purchase Program.

Before that State Street (STT) was the only dividend aristocrat which had consistently increased its dividends twice per year for almost 27 years in a row.

Traditionally, financial shares were one of the best yielding stocks in the marketplace. It seems that TARP essentially is bad news for any dividend investors, as it could result in further decreases to already lowered payments. The lesson to be learned for individual investors is to diversify across sectors, no matter how great the yields look.

Anheuser-Busch Dividend Analysis

Anheuser-Busch Companies, Inc., through its subsidiaries, engages in the production and distribution of beer. The company operates in four segments: Domestic Beer, International Beer, Packaging, and Entertainment.

It is a dividend aristocrat as well as a major component of the S&P 500 index. Over the past 10 years this dividend growth stock has delivered an annual average total return of 12.40% to its shareholders. The company has managed to deliver an impressive 9.60% average annual increase in its EPS through organic growth and share buybacks. Management has consistently bought back 3% of outstanding shares each year for the past 10 years, spending a little over $12.5 billion in the process. Without the buybacks the growth in EPS would have been 6.60% annually.

The ROE has been increasing steadily over our study period, rising from a 27% in 1998 to 67% by 2007.

Annual dividend payments have increased over the past 10 years by an average of 9.6% annually, which matches the growth in EPS. A 10% growth in dividends translates into the dividend payment doubling every 7 years. If we look at historical data, going as far back as 1983, BUD has actually managed to double its dividend payments every six years.

If we invested $100,000 in BUD on December 31, 1997 we would have bought 4545 shares (Adjusted for 2:1 stock split in September 2000). Your first quarterly check would have provided you with $590.85 in dividend income in February 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1799.16 by November 2007. For a period of 10 years, your quarterly dividend payment has increased by 154 %. If you reinvested it though, your quarterly dividend income would have increased by 204%.

The dividend payout has remained below 50% over the past 10 years. This is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that BUD is attractively valued with its low price/earnings multiple of 16 and above-average yield at 2.86%.

Disclosure: I do own shares in BUD. This is my analysis of the stock and is not investment advice. Please consult with a licenced investment professional before investing.