Don’t cry for Goldman in bank dividend kerfuffle

November 15, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Goldman Sachs’ shareholders have little to grumble about. Sure, the bank’s plans to buy back $5 billion in expensive preferred stock held by Warren Buffett appear to have been put on hold thanks to an industry-wide debate with the Federal Reserve over how to manage capital. That includes deciding when dividends can go up. But investors in Goldman’s common stock already have an advantage over the competition.

That’s because Goldman is the only major U.S. bank that did not slash its dividend during the crisis. Rival Morgan Stanley, for example, trimmed its quarterly payout to 5 cents a share, as did JPMorgan and Wells Fargo. And because of the whopping taxpayer bailouts, Bank of America hands over a nominal 1 cent a share every three months, while Citi pays nothing.

Goldman, meanwhile, has kept its quarterly payments steady at 35 cents a share. And because it had to beef up its balance sheet during the crisis by selling more common shares, the firm actually pays out more overall in dividends now than it did before the crisis. It is on course to hand out some $760 million to shareholders this year, about 25 percent more than in 2007.

Look at this unique advantage another way. While its peers contemplate if and how they’ll be able to take their dividends back up to boom-time levels, Goldman is in the odd position where it actually would have to cut its payouts to get there. If, for example, banks were to align dividends this year to the same percentage of net income they paid out in 2007, based on the consensus estimates of earnings Goldman’s payout would be cut by 43 percent.

Of course, that’s unlikely to happen. Even at current levels, Goldman’s dividend equates to less than 10 percent of expected earnings. Its larger commercial bank rivals, which have been public for far longer and built up dividends over time, generally pay out between 30 percent and 50 percent when times are good. Goldman’s path getting to that rate may have been delayed by the crisis. But compared to the competition, its shareholders are still sitting pretty.

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