What Do I Think About Bank Stocks?

Financial risk continues to mount in the markets and you should not be surprised by this, as I have been quite vocal about the high risk in the financial sector. On Monday, Bank of America Corporation (NYSE/BAC) stock fell after reporting weaker than expected earnings in its first quarter. Earnings in the quarter plummeted 77% driven by write-downs and mounting credit losses. In addition, National City Corporation (NYSE/NCC) announced that it would need to raise $7.0 billion in order to strengthen its capital position and would also cut is dividend to $0.01 per share from $0.21 per share.

This most recent news just confirms my belief that the credit crisis could get worse and impact financial and other corporate profits more as we move forward in this year in which earnings are expected to struggle. And given that the price of oil just passed $117.00 a barrel, the impact on margins and consumer spending, which in turn impact financial companies, could worsen.

A money manager asked me a few weeks ago what I thought about bank stocks. I said that they incorporated high risk and were purely dividend plays, but that I would still be cautious. My thoughts have not changed, as I still am cautious and concerned about the credit and housing markets.

If you want to buy, I suggest that you wait for market dips to accumulate; otherwise, stay on the sidelines and monitor the action before jumping in. Wait for the excess selling overhang to dissipate before putting your capital into financial stocks. When you are seeing current dividend yields in excess of five percent, be warned, as the decline in the share price has driven the dividend yield higher and this gives investors a false impression on the attraction of dividend stocks.