The Dividend Investing Blog

I awoke to an analyst on CNBC’s Squawk Box talking about Citigroup’s dividend.  He indicated that there would probably be a dividend cut and we will find out in mid-January.  The current dividend yield for Citigroup stands at 7.04%.  What are the potential reasons for reducing the dividend?

• Vikram Pandit.  Mr. Pandit is the new CEO at Citigroup.  This gives Citi an easy way to reverse previous guidances and policies that were in place.  Case in point, Citi had previously stated it would not take SIVs onto its balance sheet.  Last week Citi announced it would take on $49 billion in assets from seven SIVs.  Although Citi has previously stated it will not reduce its dividend, Mr. Pandit can certainly change that policy.
• SIV bail out.  Citigroup rescued seven structured investment vehicles (SIVs) that primarily invested in sub-prime mortgages to the tune of $49 billion.  A SIV borrows money short-term at a low rate and invests that money in long-term higher rate investments.  In this case, those long-term investments turned out to be sub-prime mortgage-backed securities.  The write down of the seven SIVs severely damages Citi’s capital ratios.

Citigroup will have to absorb the losses from the SIVs moving forward.  As sub-prime mortgages default, the company will have to find ways to pay back its creditors that put cash in the investments.  Nevertheless, Citigroup may be able to find creative ways to curtail losses in these SIVs and a government bail out is not out of the question.

Speculation is rampant on whether Citi will actually cut the dividend.  An alternative theory is that the company may issue stock in place of the dividend.  At the end of the day, it seems to me that all signs are pointing to a dividend cut and Citigroup is preparing everyone for that eventuality.

Disclosure: Author is long Citigroup.

Stocks used in this article:

• (C: 4.71, 0.00%, Yield: 23.78%)