JPMorgan Chase & Co , the second-largest U.S. bank, slashed its common stock dividend 87 percent on Monday, a surprise move by a lender considered among the strongest in the U.S. financial sector.

The bank also said it has been solidly profitable this quarter, and that the outlook for the three-month period is roughly in line with analyst forecasts. Shares rose 5.5 percent in after-hours trading.

JPMorgan said its decision to lower its quarterly dividend to 5 cents per share from 38 cents will save $5 billion of common equity a year. It hopes the lowered payout will help it pay back the $25 billion of capital it got in October from the government's Troubled Asset Relief Program faster.

Extraordinary times must call for extraordinary measures, Chief Executive Jamie Dimon said on a conference call. He said JPMorgan was not asked by anybody to cut the payout, but did so out of a normal abundance of caution.

Shares of JPMorgan, a Dow Jones industrial average <.DJI> component, rose $1.08 to $20.59 after-hours, after falling 39 cents during regular trading. The New York-based lender announced the dividend cut after U.S. markets closed.

I will accept a lower dividend if they are able to repay the government faster, said Chris Armbruster, senior analyst at Al Frank Asset Management in Laguna Beach, California, which owns JPMorgan shares. The sooner they get out from that, the better.

JPMorgan expects in the first quarter to record about $2 billion of credit costs and writedowns at its investment bank, to boost reserves for credit cards and home lending, and to write down about $400 million in private banking.

It also said earnings expectations are on track from its September purchase of the banking units of failed lender Washington Mutual Inc .

Analysts, on average, expected JPMorgan to post a quarterly profit of 35 cents per share on revenue of $21.96 billion, according to Reuters Estimates.

OTHER BANKS

Bank of America Corp and Citigroup Inc , JPMorgan's largest rivals, have slashed their quarterly dividends to a penny per share since November.

Each has gotten $45 billion of TARP money since October, and unlike JPMorgan also got a government bailout that capped losses on billions of dollars of toxic assets.

Dimon said the dividend cut reflects the potential, not the certainty, for a highly stressed environment of a two-year economic recession where the U.S. unemployment rate rises above 10 percent, and home prices fall 40 percent from their peaks.

JPMorgan said it hopes to return to a more normalized dividend when the environment stabilizes.

It puts us in a position to do it sooner, Dimon said.

It's a prudent use of capital, said Bill Fitzpatrick, an analyst at Optique Capital Management in Milwaukee, which owns the bank's shares. It's difficult to raise new capital, so this is an excellent source of funds.

Many analysts have said Wells Fargo & Co , which is the fourth-largest U.S. bank and received $25 billion of TARP money, may cut its 34 cents per share quarterly dividend, which equates to a 12.3 percent yield. Spokeswoman Julia Tunis Bernard declined to comment.

I would not be surprised in the slightest to see more dividend cuts, especially from banks that haven't done it, and those heavily reliant on government funds, Armbruster said.

(Reporting by Jonathan Stempel; Additional reporting by Euan Rocha, Jonathan Spicer and Dan Wilchins; editing by Jeffrey Benkoe, Bernard Orr)

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