Fannie Mae Liquidity Answer: Cut Dividend & Sell Securities (FNM, FRE)

It’s no secret that Fannie Mae (NYSE:FNM) has been in trouble, and this afternoon we just found out some more of what we have been expecting.  The troubled GSC is cutting its quarterly dividend by 30% down to $0.35 per quarter from $0.50.  It is also apparently raising some $7 Billion in preferred securities sales after a strong reception to a previous offering.

The dividend cut really isn’t this big of a shock even if the reports are "Breaking News" and "News Flash" stories.  This stock has performed so poorly that the dividend was now over 5%. 

We noted just last week how Rich Pzena had labeled Fannie’s brother GSC company Freddie Mac (NYSE: FRE) as a great long-term value stock after its meteoric drop as well.

Fannie Mae shares closed down almost 3% at $35.18 today and shares are down about 3% more at $33.95 or thereabouts in after-hours trading.  The 52-week trading range is $26.38 to $70.57, so it is still down more than 50% from the year highs.

Freddie Mac (NYSE: FRE) closed down 3.6% today at $32.31, and it is down 1.5% at $31.82 after the close in sympathy with sister Fannie.  Its 52-week trading range is $22.90 to $69.85, so it too is down over 50% from the highs of the year.  Freddie’s dividend is roughly 3%.

Don’t be too shocked when these dividend cuts start happening at the major banks as well, despite what the media pundits are saying.

By the way, Fannie Mae is guilty of a REG. FD violation here.  They sent this out to selective newswires and didn’t issue a press release and didn’t update this on their website.  Of course with so many troubled mortgages the SEC is going to let this slide (particularly as this is a quasi-agency too), but companies have a legal obligation to issue their statements in an "equally accessible manner" so that investors big and small have access to information.  Their press release came out after 5:00 PM on PRNewswire.

Jon C. Ogg
December 4, 2007