Is the Financial Crisis Over Yet for Financial Equities?


The cause of the financial crisis of 2007 -2008, also known as the Great Recession of 2008, is attributed to many different theories.  However, one of the most common theories is an easy money regulatory environment that led to an abundance of subprime loans, which in turn inflated real estate prices to bubble levels. Additionally, many blame the Financial sector, predominantly the money center banks, for exploiting the lax lending requirements with reckless and greedy behavior.  They did this through the creation of and proliferation of high risk bundled subprime mortgages (CMO’s, etc.) and the creation of other high risk and complex financial products that were being pawned off as safe investments.

Additionally, many attribute the repeal of the Glass-Steagall Act in 1999 as a major contributor to the financial crisis, which effectively removed the separation between investment banks and depository banks in the United States.  There was plenty of blame to go around, which included avarice, greed and excesses on Wall Street, and the failure of regulators to include many of the most prominent credit rating agencies.

Nevertheless, it is quite clear that the worst financial crisis since the Great Depression of the 1930s was due in great part to the greedy and reckless behavior on the part of various entities and institutions comprising the Financial sector.  The businesses of most money center banks, many major insurance companies, and credit rating agencies were devastated as a result.  Of course, the damage also temporarily ravaged the entire stock market, affecting businesses in all sectors because America’s financial system was literally fractured and frozen.  The result was the Great Recession of 2008, which also spread its economic destruction on a global scale.

Mohnish Pabrai’s Lessons From Buffett, Munger And Life

Mohnish PabraiEarlier this month, value investor Mohnish Pabrai took part in a Q&A session with William & Mary College students. Q3 2021 hedge fund letters, conferences and more Throughout the discussion, the hedge fund manager covered a range of topics, talking about his thoughts on valuation models, the key lessons every investor should know, and how Read More

However, it is not my intention to debate these issues, instead, my objective with this article is to review the current state of dividend paying stocks within the Financial sector as I try to determine whether there’s currently value here or not.  But before I do that, I thought it might be interesting to see in graphic form, just how badly some of our most prestigious financial institutions were affected.  The following Earnings and Price Correlated F.A.S.T. Graphs™ on two prominent banks instantly illustrate what it would take thousands of words to convey.

Bank of America Corp – 1999 to 2006

The following graph looks at Bank of America Corp (NYSE:BAC) from calendar year 1999 to calendar year 2006, which was the time period starting from the repeal of the Glass-Steagall Act to just prior to the bursting of the US housing bubble.  These were the earnings growth golden years for large financial institutions in the United States.  Earnings per share for Bank of America grew from $1.53 to $4.65 by year-end 2006 (look at the EPS line at the bottom of the graph).  This represented a 12.1% compound annual growth rate of operating earnings per share for Bank of America.


However, the next graph illustrates the punishment that excess, fear and greed created, deserved and resulted in.  Earnings per share fell like an avalanche on a mountaintop from $4.65 at year-end 2006 to losses (the orange line on the graph).  Of course, since earnings drive market prices and dividend income, both followed suit in rather breathtaking fashion.  After peaking at over $55 a share in 2006, Bank of America’s stock price bottomed out at $2.53 by the spring of 2009.  That’s approximately a 95% drop in shareholder value.  Dividend income fell in tandem from a high of $2.40 per share in 2007 to only four cents a share by 2008.  That represents a 98% dividend cut.  These were devastating results for retirees depending on their Bank of America dividends.


Just for validation purposes, I have also included an earnings and price correlated graph on Citigroup Inc (C).  Instead of boring the reader with going over the numbers again, I will allow the graphic to speak for itself.  However, it’s important to recognize that both of these prestigious bedrock’s of the Financial sector have continued to reel from their reckless behavior.  Although both graphs, Bank of America and Citigroup, show that there has been a modest amount of recovery since, the crisis is far from over for these storied financial institutions.


Next, and in the spirit of presenting a balanced view, I submit a Warren Buffett favorite, Wells Fargo & Co (NYSE:WFC).  Clearly, Wells Fargo suffered similar, but much less severe damage from the financial crisis.  Even though it wasn’t quite as bad as what we saw with Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C), it is quite clear that Wells Fargo must have also participated in the easy money opportunities created by a lax regulatory lending environment.  On the other hand, their recovery has been much stronger than my two previous examples.  Nevertheless, long-term shareholders suffered significant, albeit temporary, price erosion and dividend cuts.

Although it may not be much solace to the diehard dividend growth investor, both Wells Fargo’s stock price and dividend income have moved back into historically normal levels.  As you will see later in this article, I have included Wells Fargo in my conservative list of potential dividend growth stocks within the Financial sector.  However, it’s up to the individual whether they would be willing to forgive this company for its past transgressions, or not.

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The Financial Sector

This is the eighth in a series of articles designed to find value in today’s stock market environment. However, it is the seventh of 10 articles covering the 10 major general sectors. In my first article, I laid the foundation that represents the two primary underlying ideas supporting the need to publish such a treatise. First and foremost, that it is not a stock market; rather it is a market of stocks. Second, that regardless of the level of the general market, there will always be overvalued, undervalued and fairly valued individual stocks to be found.

My first article was titled “Searching For Value Sector By Sector,” my second article was titled “Finding Great Value In The Energy Sector.” My third article was titled “Finding Value In The Materials Sector Is A Material Thing.” My fourth article was titled “The Industrial Sector Offers A Lot Of Value, Dividend Growth And Income.” My fifth article was titled Beware The Valuations On The Best Consumer Discretionary Dividend Growth Stocks, and my sixth article was titled, Are Blue-Chip Consumer Staples Worth Today’s Premium Valuations?, and my

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Charles (Chuck) C. Carnevale – Co-Founder and Chief Investment Officer, has been working in the securities industry since 1970. He has been a partner with a private NYSE member firm, the President of a NASD firm, and a Vice President, Regional Marketing Director for a major American Stock Exchange listed company, and he was an Associate Vice President and Investment Consulting Services Coordinator for a major NYSE member firm. Prior to forming EDMP, Inc., he was a partner in a 30-year-old established registered investment advisory in Tampa, Florida. Chuck holds a Bachelor of Science in Economics and Finance from the University of Tampa. Chuck is a sought-after public speaker who is very passionate about spreading the critical message of prudence in money management. Chuck is a Veteran of the Vietnam War and was awarded both the Bronze Star and the Vietnam Honor Medal.
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