Wachovia's Checklist To Diminish Share Value

By Wayne Pinsent | April 16, 2008 AAA

Wachovia (NYSE:WB) unleashed a flood of bad news on the market Monday, as the company displayed the deepening cost of its mortgage troubles. Wachovia, the nation's fourth largest bank by assets, managed to check off every move in the book to diminish share value. It announced that it is raising $7 billion in capital, slashing its dividend, and throwing in a first-quarter loss to top it off. The news left the stock and its CEO G. Kennedy Thompson on thin ice with investors.

Swing to a Loss - Check
Wachovia reported a net loss of $393 million (20 cents per share) to start off 2008 on a very sour note. The net loss was a massive swing from the net profit of $2.3 billion ($1.20 per share) reported a year earlier, and much worse than the 40 cent per share profit that analysts had been expecting. These results included $2 billion in write downs and another $2.8 billion in loan provisions tied to the mortgage crisis.

The loan provisions exceed net charge offs by $2.1 billion. The company stated that the problems were tied to "more severe deterioration in the residential housing markets", with things particularly bad in California and Florida. The company also cited "unprecedented consumer behavior", a formal way of saying people aren't paying their loans.

Share Dilution - Check
The weakness was far from over for Wachovia, in fact the quarterly loss was not even the half of it. The company also reported that it was raising $7 billion in capital through two concurrent equity offerings. Wachovia priced $3.5 billion of common stock, and another $3.5 billion of preferred on April 14. The end result will probably be even more since the company granted over-allotment options to the underwriters in both offerings, and the offerings were oversubscribed.

For perspective, with the company's market cap around $50 billion now, the new common shares represent around 7% of that, without even accounting for the new preferreds or the over-allotment options. The end result is dilution to the shares, and more bad news for shareholders. (To learn more, read Why Do Share Prices Fall After A Company Has A Secondary Offering?)

Slash the Dividend - Check
As if that wasn't enough the company also announced it is slashing its dividend by 41% to $0.375 per share, which will save the company $2.1 billion a year. Both the capital raising and dividend slashing continue to show the unprecedented environment the banks are facing. Citigroup (NYSE:C) has had to make the same decisions. (For related reading, check out Is Your Dividend At Risk? and Dividend Facts You May Not Know.)

Will Thompson be Shown the Door?
The shares have slumped so much recently that the stock of the company that Chairman and CEO, Ken Thompson built up are below the price when he originally took the reins in 2000. It is humbling for a man who worked so hard to build up Wachovia as a reputable company on the banking scene. He helped it become the fourth largest bank in the U.S. by assets behind, Citigroup, Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM).

Thompson did a fine job until recently when the company got far too embroiled in mortgages, and he admits to regretting his decision to acquire Golden West in 2006. The Golden West acquisition brought a lot more loan exposure to Wachovia, and even though Thompson claims it will still be a positive, the timing could not have been worse. He built up the brand, but the shares don't lie. The shares were looking good a year ago, but now investors are steaming mad with Thompson and he will likely have to go.

The recent moves by the company give it some breathing room to change direction, and free up some of its exposure. But it also puts the shares in a dark place. Pressure will remain on the shares, and with how surprising all of this was, it also signals that the troubles are far from over for the regional banks.

The Bottom Line
Wachovia reported a laundry list of news that brought the shares down and will continue to put a leash on them through dilution. The news from the company was much worse than expected. I feel that even though Thompson did a lot to build up the brand, his star power has been diminished and he will have to go. The news from Wachovia also signals we may be hearing more bad news from the regional banks.

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