Why is Freddie paying any dividend at all?

Posted Aug 6th 2008 11:55AM by Carol Vinzant
Filed under: Federal Natl Mtge (FNM)

Freddie Mac (NYSE: FRE) announced today that it lost $821 million this quarter and cut its quarterly dividend from 25 cents a share to five cents a share, pending board approval. And it's paying the full dividend on preferred stock.

My question is why is this company paying ANY dividend? I know that dividends aren't necessarily just from profits like you might think. But this company lost $1.63 a share, so why is it giving shareholders even a nickel?

We all know this company may be nationalized eventually, however remote that possibility is under the current administration. We all know that taxpayers are on the hook for up to $25 billion or more for the bailout of Fannie and Freddie. And we know the Treasury can now buy shares in Fannie and Freddie to prop them up. But now it's appealing to shareholders' sense of value by keeping a dividend?

Until now the dividend yield had been ridiculously high -- about 13% -- making it arguably a good investment on that basis alone. Now it's about 2.5%. Not great, but still something. Are they thinking someone is going to buy Freddie because of that sweet five cents a share dividend? It's not enough to make someone want to buy or keep the stock, but it is enough to cost the company (and possibly taxpayers, eventually) money.

With about 600 million shares outstanding, that amounts to $30 million a quarter. I suspect they could use that money elsewhere.

Tags: bailout, crisis, dividend, fannie, freddie, inthenews, mac, mortgage

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8-06-2008 @ 1:08PM

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