Analysts at Goldman Sachs think Citigroup (C) will have to cut its dividend 40%. Their expectation is that the big bank "may write off $18.7 billion in collateralized debt obligations" in the fourth quarter, according to Bloomberg. The bank has a float of about five billion shares so a cut is worth a lot of money.
Citi has said several times that it will not cut its dividend, but, at 7% yield, it is high compared to most other banks. The fact of the matter is that no one with any sense is buying shares in the bank for their yield. The 7% could be wiped out in a day if bad news knocks the stock down again. Since it is off by almost half this year, that is a distinct possibility.
Citi has become a de facto growth stock, whether the company’s board and management like it or not. The dividend has no place in the list of reasons Wall St. would consider when investing in the shares. The fact of the matter is that one good quarter or the sale of a major division of the firm could move the stock up $5 or $10 which is a return of as much as 30% over where Citi trades now.
Citi has become what no bank wants to be. It is a speculative investment. It is a large cap stock with small cap dynamics. The dividend should be cut. No one is investing is a distressed financial institution in the hope of clipping coupons.
Douglas A. McIntyre
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