Meredith A. Whitney of CIBC World Markets, said Wednesday night that Citigroup (C) “might” be forced to cut its dividend or sell assets to head off what she said was a $30 billion capital shortfall. It won’t happen anytime soon.
Citi currently pay a $2.16 annual dividend on almost 5 billion shares. Want to assure its safety? Stop the acquisition spending that has totaled $26 billion since the spring of 2006. Citi recently agreed to buy the rest of Japan’s Nikko and today announced they are buying hedge fund Carlton Hill. Moves like this illustrate one of two things, they are running out of cash and are complete morons for continuing to spend it (not likely) or their currently liquidity is sufficient to accomplish both (more likely). Let’s not forget, Citi will still earn $20 billion next year, plenty sufficient to pay the dividend.
If Citi is forced to cut the dividend CEO Chuck Prince might as well just stay home. Both the board, large shareholders like Prince Alweed that have backed him and Prince himself fully recognize this.
The possibility of a cut is primarily based on the assumption of further right-downs in the CDO market in Q4. Prince is on record publicly saying that “Q4 is looking much better that Q3”.
If Citi cuts it dividend the pain will be felt across the financial sector. It just is not going to happen. The entire financial sector is getting crushed today with Bank of America (BAC), Goldman Sachs (GS), Wachovia (WB), Merrill Lynch (MER) and Lehman (LEH) all falling in excess of 3% in early trading.
3 replies on “Citigroup Will Not Cut Dividend”
When will the Board of Directors ( http://www.newsvisual.com/newsvisual/2007/10/management-expe.html ) step up? Chuck Prince has practically lost the confidence of the majority of shareholders, the stock is rapidly falling, yet we have heard almost nothing from the Directors. Their #1 priority is to the investors, but with their current actions that is questionable.
Can’t disagree with you
I don’t think it’s purely an issue whether Citi will have enough cash but rather if they will be permitted to due to regulatory guidelines requiring banks to be sufficiently capitalized The analyst claims Citi is significantly under capitalized and additional write offs could stretch that further. The basal requirements for tier I & II capital ratios I think is somewhat of a judgment call if you think about how considerable chunk of their balance sheet is a judgment call.
You raise a good paint about the acquisitions: Citi obviously feels its balance sheet is satisfactory, the analyst I thinks feels it’s not and that the whole Assets – Liabilities= Equity accounting identity illustrates when assets decrease and liabilities constant, so does equity or capital. To me it’s an interpretation of whether @1 of cash invested is offset with a 1 increase of the assets purchased. Or even if $1 increase in liabilities actually yields $1 increase of assets. Thus is L rises quicker than Assets because impairments, leverage ratio rises compounded by deduction from equity in “other-comprehensive income” statement.
To fix this problem would to quit spending cash since its has a known value. Or, the fed might force Citi to retain cash and suspend the dividend.
Todd, it’s just like you said either mgmt is being cocky or stupid in not accepting the notion of greater impairment or they know what they have and they know what they are doing. I think the analyst may have mistook her fear that your Mass boy Mitt, will make the Een from NY look clueless when the two start debating economic policy face to face, causing her to think the sky was falling in on #20B annual income powerhouse. More likely conspiracy theory that the facetious one above would be to turn up the heat on Prince’s ouster. Probably played a part, because if not the dots don’t connect, and either Citi or she are way wrong. They generate the cash to pay it, only way it would get cut if Citi was required to stockpile cash for a period of time because it was determined that so much of their assets are worthless BS, and they need to internally re-capitalize. If that’s they case, which is highly unlikely to be that great of magnitude, then a cut dividend would be the least of all our worries.