Despite a big asset purge, Merrill’s stock hits new low

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From Times staff writer Walter Hamilton:

Dumping troubled assets for pennies on the dollar may not be the way to bolster a sliding stock price, after all.

Shares of Merrill Lynch & Co. slumped today to their lowest closing price in nearly 10 years as investors continued to fret about how much the soft economy and a still-large overhang of bad debt could weigh on the brokerage giant.

The stock slid 92 cents, or 3.7%, to $23.82, falling below its previous multiyear closing low of $24.33 on July 28 -- the day that Merrill announced plans to unload mortgage assets once valued at $30.6 billion for a mere $6.7 billion, or 22 cents on the dollar.

Analysts applauded Merrill’s sale at the time as a healthy purging. But the transaction has had no lasting benefit on the firm’s moribund stock price.

For one thing, Merrill still holds mortgage securities currently valued at $8.8 billion. And because the company financed $5 billion, or 75%, of the July 28 asset sale to private-equity firm Lone Star Funds, the brokerage would be on the hook for more losses if the value of the assets falls more than 25%. (Under the deal’s terms Merrill wouldn’t be able to go after Lone Star itself for any of the $5 billion.)

‘You can’t say ‘Merrill took the write-off, so everything’s OK,’ ‘ said Steve Persky, chief executive of Los Angeles-based hedge-fund firm Dalton Investments. ‘Housing prices continue to fall, losses on the disposing of assets are continuing to rise, default rates are continuing to rise and the economy is slowing.”

Worries about Merrill’s continued exposure to dicey debt are compounded by its high leverage, which would magnify any losses. ‘The problem with all these very leveraged institutions that have a lot assets whose value is murky is people are very uncomfortable with what the assets look like,’ Persky said.

Another factor depressing the stock: talk that Merrill might slash its dividend to preserve capital. Cutting the payout in half would save $1.1 billion a year, David Trone, an analyst at Fox-Pitt Kelton said in a research report last week.

The $1.40-a-share annual dividend equates to a yield of 5.9% at today’s closing stock price. That is the highest of any major brokerage and far above the roughly 1% dividend yield that Merrill historically has paid, according to Trone.

Moreover, the current dividend would eat up more than half of Merrill’s estimated 2009 earnings, Trone said.

‘It doesn’t make sense to us,” he wrote, “that a company would pay out at a 50% rate in the midst of continuing balance sheet challenges.’