Citigroup Dividend Cut: Just Talk

Citi (C) CEO Vikrim Pandit has already commented on the dividend issue and as far back as early November I commented that I felt it would not be cut. Despite recent reports like the Goldman Sachs (GS) estimate of a 40% cut, recent events have only buffered my feelings on the subject.

Currently Citi pays just under $11 billion a year in dividends. Sounds like a lot until you consider that in the last 12 months Citi earned almost $24 billion. My guess is that Pandit had no desire to be the guy who cuts the dividend. It would be construed as taking the easy way out, rather than trying to actually fix Citi's issues. I have said repeatedly in the past he has $2.3 trillion in assets under his control and can easily sell chunks of them to raise capital if he needs it.

On Thursday the Wall. St. Journal reported that Citi is looking at doing just that. Units rumored on the block include Student Loan Corp., which is 80 percent owned by the bank, its North American auto lending business, the Brazilian credit card company Redecard SA, in which Citigroup held a 24 percent stake as of Sept. 30, and its Japanese consumer finance business.

Pandit is also is laying off about 20,000 employees as he streamlines operations. Now, the current list of items for sale is just the beginning and the "low hanging fruit". In his first interview as CEO Pandit did say regarding possible asset sales "all options are on the table". He was far less open to a dividend cut saying "the board has spoken on that and the dividend is where it is".

Do I think the dividend will be raised in 2008? Not by a long shot. But sitting here, getting over 7% taxed at 15%, is a really nice deal while we wait for this thing to shake out. Financials are a huge opportunity here, for investors with the right time frame and temperament.

Comments

[Sly:]

Citi's dividends by year were:
Year Dividend Growth
2003 $1.10
2004 $1.60 45.45%
2005 $1.76 10.00%
2006 $1.96 11.36%
2007 $2.16 10.20%
The dividends grew are profits grew. Here are some comments:
1) There is nothing magical about the $0.54 a quarter / $2.16 a year dividend number, which is about twice what it was in 2003. Moreover, the dividend grew at a rate faster than it should have because profits were inflated by about $3 to $5 billion a year for the past few years by subprime excesses. The dividend never should have been raised to its current level in the first place so what's wrong with setting it back lower?
2) Stocks would have priced in a certain grown rate to dividends based on recent experience. E.g., Stocks would have expected dividends to grow by 10% to $2.38 in 2008. Just by keeping dividends the same in 2008 Citi is in effect lowering the dividend relative to expectations and also lowering the dividend if you compare values adjusted for inflation. If Citi doesn't lower the 2008 dividend and instead just keeps it unchanged for as many years as it takes for inflation and/or profits to catch up then that strategy isn't any better and, I would argue worse, for shareholders who collect dividends.
3) Employees of Wall Street Firms get bonuses that are tied to a company's profit. Employees have good years and bad years. Dividends should be a share of the profits… if profits are down, then bonuses will be down… and why not dividends too?
4) About the best reason I have heard to keep the dividend as-is is to help people who are retired who live off dividend income. However, that reasoning is flawed. That's because there is another way to extract income for living expenses out of a stock… to sell the stock. For example, for years Microsoft stock went up even though it didn't pay a dividend… and lucky retirees who owned Microsoft could have sold off some shares each quarter to mimic the effect of dividends. (I agree that dividend payments are different that selling stock when you take into account taxes… this difference should be of lesser consequence to retirees).
5) Citi's stock has already been reduced by about 40% in anticipation of a 40% cut in dividends. So I don't expect the stock to drop once Citi reduces its dividend…. the market has already priced it in. Citi's stock will go up when the dividend it cut as investors and Citi restores a strong capital base and that is a good thing.
6) When you say that the Citi CEO doesn't want to cut dividends because that is 'taking the easy way out' here is what I think… when I get lost I ask for directions… I take the easy way out rather than wander around lost. Sometimes the easy way out is the smart thing to do and the right thing to do.

2008 Jan 01 03:16 PM

[anti-sly:]

The dividend will not be cut and should not be cut. It still amazes me how much people like to talk about stocks yet none of them actually read the balance sheets, cash flow statments, etc. Subprime wasn't as big of an earner as people are making it out to be, nor was the written down overly large in relation to the size of the company.

Another thing sly is wrong about is if they actually do cut the dividend you can be assured that the stock will drop. He fails to understand that markets are not rational. Such a move would be viewed as negative and cause a selloff/shorting. It doesn't matter if it has already been priced in.

Citigroup is becoming a great value play. P/E of 7.92 and a dividend yield of 7.4% in a company that other than one mistake has been a very solid company. Also, if they finally spinoff some stuff they will release a lot of hidden value.

2008 Jan 01 09:40 PM

[User 137633:]

Wow, don't you guys look smart now?

www.bloomberg.com/apps...

2008 Jan 15 01:50 AM

[Sly:]

Try this link:
money.cnn.com/2008/01/...
"... a 41 percent cut to its dividend..."
"Citigroup (C, Fortune 500) shares gained 1.5 percent in pre-market trading on the news."

2008 Jan 15 07:25 AM