Killing The Dividends At Fannie Mae (FRE) And Freddie Mac (FRE)

GM (GM) cut its dividend to zero. It is a nifty way to save a lot of money and, once a company’s shares have fallen by a huge amount, investors almost expect it. Several banks like NCC (NCC) have taken similar actions.

Fannie Mae now has an extraordinary yield of over 14%, paying out $1.40. No one at the company meant for it to be that high, but the drop in share price has put it there. Freddie Mac’s (FRE) yield is also above 14%. On paper, that makes the two companies among the best investments around. Where else can shareholders get that kind of interest?

Freddie Mac has 647 million shares outstanding. That puts that amount of money it has to pay out each quarter just short of colossal.

According to Bloomberg over the last year, "Fannie Mae’s payouts totaled $2.48 billion." Freddie Mac’s total is well over $1.5 billion.

Most investors know that the yield from both companies can’t be sustained. Stockholders who were in for the interest payments walked a long time ago. That means cutting dividends it not likely to push the shares in the two companies down.

As a matter of fact, Wall St. would probably be relieved that managements had enough sense to save the money. They might even get a little rally out of it.

Douglas A. McIntyre