[lbo-talk] Citi to cut dividend, etc.

Michael Pollak mpollak at panix.com
Mon Jan 14 15:28:09 PST 2008


On Mon, 14 Jan 2008, a WSJ newsalert was cited:


>> NEWS ALERT
>> from The Wall Street Journal
>>
>> Jan. 14, 2008
>>
>> Citigroup is expected to announce a sizable dividend cut

The Lex column in the FT had a decent item on this this morning:

January 13 2008 Financial Times

Citi Sicker

Banks will go a very long way before they take an axe to the dividend. JPMorgan Chase held on to its payout through the dark days of 2001 and 2002 as earnings were trampled by the technology bust. The choice to live with an eye-popping payout ratio of more than 100 per cent was vindicated when its earnings power picked up.

Citigroup is in a different position. It needs capital -- lots of it, again. Its Tier 1 capital ratio, which is a measure of a bank's ability to absorb losses, needs rebuilding, in spite of the $7.5bn it raised two months ago. Since then, estimates of Citi's collateralised debt obligation writedowns have kept rising. A number of analysts now reckon the fourth quarter hit could reach $15bn to $18bn, well above the $8bn to $11bn mooted by the bank in November. Then there is the extra pressure of the bank being forced to bring assets back on balance sheet, courtesy of the commercial paper market crisis. These will leave Citi $6bn short of its targeted Tier 1 ratio, according to Goldman Sachs.

If this were just a fourth quarter story, one could understand management's reluctance to cut the $10bn-$11bn-a-year dividend bill. A cut is not costless: it hits management credibility and could drive the stock down. But it is the right thing to do, because Citi's challenges do not look like a one-off. First, a portion of Citi's recent growth was fuelled by markets, such as securitisation, that may not fully recover. And an economic downturn in the US could hit consumer finance earnings hard, especially if the cyclical spike in bad debts is made worse by a continued slump in the housing market. Second, Citi's growth plans require a comfortable cushion of extra capital. Acquisitions in emerging markets, for instance, require the capital to cover a big goodwill bill.

A second big capital raising simply does not make sense if its purpose is to fund a payout that should be rebased. With Citi yielding a massive 7.6 per cent, a dividend cut of as much as 50 per cent is quite feasible.



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