Morgan Stanley posts a loss and hacks its dividend

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Wall Street has felt better this year about Morgan Stanley‘s long-term future. Perversely, that helped contribute to the brokerage’s poor first-quarter results.

The company today surprised investors with a larger-than-expected quarterly loss that was driven partly by accounting rules related to the valuation of the firm’s debt.

But more fundamental factors also worked against Morgan -- including $1 billion in real-estate-related losses.

The brokerage’s net loss for the quarter was $177 million, or 57 cents a share, much worse than the 8-cents-a-share loss that analysts had predicted. The company had earned $1.4 billion, or $1.26 a share, in the year-earlier quarter.

Morgan also slashed its quarterly dividend to 5 cents a share from 27 cents, a move the company said would save it $1 billion a year.

After falling more than 9% at the opening bell, Morgan’s shares were down $1.38, or nearly 6%, to $23.27 about 11:10 a.m. PDT. The stock still is up about 45% year to date.

The company’s red ink in the quarter stemmed partly from accounting rules that dictate how firms record changes in the value of their own debt. In Morgan’s case, interest-rate ‘spreads’ on the company’s own bonds have narrowed this year, a seemingly positive development that shows investors feel less worried about the company’s long-term financial viability.

But that narrowing forced a $1.5-billion writedown -- the logic being that Morgan now would have to pay higher prices in the open market if it were to buy back its own debt.

Still, analysts focused more on continuing real-estate-related write-offs. At a time when financial giants such as Goldman Sachs Group and Wells Fargo & Co. have buoyed investors with better-than-expected first-quarter results, Morgan’s disappointing performance showed how toxic assets -- particularly in commercial real estate -- continue to weigh on banks.

‘On balance, Morgan Stanley is an underperformer relative to peer reports, particularly Goldman [Sachs],’ analyst David Trone at Fox-Pitt Kelton Cochran Caronia Waller wrote in a report to clients.

-- Walter Hamilton