KeyCorp shares tumble after dividend is slashed

KeyCorp said it’s looking for flexibility to make more loans.

Associated Press

KeyCorp shares tumbled Friday, as investors punished the regional bank for slashing its dividend for the second time in five months and continued to flee financial stocks amid concerns about the stability of the sector.

Cleveland-based KeyCorp said Thursday its regular dividend for the fourth quarter would be 6.25 cents per share, down from its third-quarter dividend of 18.75 cents per share.

The announcement came six days after KeyCorp said it expects to raise $2.5 billion by issuing senior preferred stock and warrants to the Treasury Department as part of the federal government’s $700 billion bank-rescue program.

KeyCorp Chief Executive Officer Henry Meyer said the dividend reduction and fresh money from the government will give it flexibility to make more loans.

A troubled KeyCorp would add to Cleveland’s woes.

In October, the city’s other major bank, National City Corp., was sold to PNC Financial Services Group Inc. of Pittsburgh after National City’s common share price dropped well under $3 and its dividend was slashed to 1 cent. That deal is expected to close by Dec. 31.

KeyCorp shares at the close on trading Friday were down 64 cents, or 9.3 percent, at $6.27.

The Keycorp dividend cut comes as worries mount that the government’s financial rescue plan won’t be sufficient to cover future losses and Citigroup Inc. is reportedly considering a sale of all, or part, of the company.

New York-based Citigroup is scheduled to hold a board meeting Friday to discuss the matter, the Wall Street Journal reported. Citigroup’s shares tumbled nearly 20 percent to below $4 a share — their lowest level in more than 15 years.

Concerns are growing that the deteriorating economy and still-turbulent markets will slam banks with more write-downs in the coming quarters. What began as a subprime residential mortgage crisis has ballooned into a full-blown debt crisis, escalating defaults in everything from leveraged loans to credit card debt to commercial real estate loans.

In a note to clients Friday, RBC Capital Markets analyst Gerard Cassidy said KeyCorp’s decision to cut its dividend does not bode well for the financial firm’s earnings outlook. KeyCorp said in June it would cut its third-quarter dividend by 50 percent.

“The company’s decision to slash the dividend suggests to us the outlook for the company has deteriorated from the end of the third quarter,” Cassidy wrote in a research note to clients. “We believe the company will incur a larger than expected kitchen sink in the fourth quarter which will lead to a larger than expected loss for the quarter.”

He said that as the commercial real-estate markets weaken next year, KeyCorp is likely to incur higher credit costs due to its market exposures.

Because of the dividend cut and the increased exposure and risk, Cassidy lowered his 2008 earnings estimate for KeyCorp to a loss of 55 cents per share from a loss of 16 cents per share. He lowered his 2009 earnings estimate to 30 cents per share from 50 cents per share.

Analysts polled by Thomson Reuters, on average, forecast a loss of $2.12 per share in 2008 and earnings of 65 cents per share in 2009.

Cassidy also slashed his price target on the shares to $6 from $9.50.