In July 2003, Citibank triumphantly raised their dividend 75% from 20 cents a share to 35 cents. Subsequent increases brought the dividend to 54 cents before the cuts of the last two quarters. A complete history is here. This was done to take advantage both of the Bush tax cut lowering federal taxes on dividends to a flat 15% instead of being treated as regular income (39% in the late Clinton years), and frankly business was on a roll, the fed was cutting, housing was booming. It was also, as BusinessWeek put it at the time in what can now only be regarded as an ominously prescient article, a way for long time CEO Sandy Weill to go out on a boom:
“I don’t think it’s a coincidence that they raised the dividend 75%,” says Samuel L. Hayes III, professor of investment banking at Harvard Business School. “He wants to go out with a bang, and this does it in terms of a very tangible signal that goes out to the shareholders of Citigroup.” Adds Prince Alwaleed: “This is Sandy looking after his legacy and very deservedly so. And he’s telling the market that he is very confident about the future of Citi, otherwise there’s no way he would implement the dividend increase.”
Fast forward a mere four years and forty billion in capital raised later, and what is the common dividend? 32 cents, still 60% over the quarterly payout in the 2nd quarter of 2003.
Of course directors of a firm whose stock price is largely held up by the dividend think very cautiously about any cut, much less one to a rate that was in effect five years ago. Citibank was the recommend-every-issue-of-Money-Magazine safe global banking play. But what happens to this last leg if the Bush Tax cuts do in fact sunset in 2010. An event which will be rapidly priced in six months from now with either an Obama victory or greater Democratic gains in the House and Senate. Should the former not occur, the latter almost certainly is on the table with three successive midterm house losses in “safe” Republican seats.
A study from the Federal Reserve concluded that while the tax cut did not have an overall effect on the aggregate value of the US market (arguable,) it did “induce asset reallocation within equity portfolios [towards high dividend stocks, like the 4% yielding banks].” That process would clearly reverse.
Citibank has 5.25 billion shares outstanding, a number that has fluctuated of course over the last five years. Assuming the average was five billion shares, over the last twenty quarters of payouts the difference between the increased payout at the time and theoretically maintaining the payout was $4.52/share, multiplied over 5 million shares is a 22.6 billion cost, or slightly over half the capital they’ve had to raise. If one did a n.p.v. calculation depending on the annualized return on that difference you could say the sums are roughly equal.
This is a train barrelling down the track at the stock of Citigroup. It would be rewarded — if after a volitile adjustment of portfolio managers — by cutting the dividend altogether until the company was in a decent enough capital shape that their shareholders won’t feel a need to tremble every time Meredith Whitney comes on Bloomberg to discuss their future.
The original Citibank vision even before the similar original Weill/Travellers vision, of a truly global entity dominating diversified financial services, is probably still the legitimate future of banking. It was a model company, the Great company in Built to Last by Jim Collins contrasted with the stodgy Chase. Scale nearly always wins. But only if you have the dry powder to use when the getting is good, as Berkshire Hathaway (dividend: 0) repeatedly demonstrates. Until then, AVOID C $23.
