On a conference call Friday morning to discuss the bank’s results, Mike Mayo of Deutsche Bank, who just upgraded Citi from “sell” to “hold,” questioned the bank’s policy of continuing to pay a dividend given its lack of profits and the fact that it is unloading assets to shore up its capital base. “You reported a loss for the quarter, you are selling off assets to improve capital — why not just cut the dividend?”, Mr. Mayo asked.
Citigroup has already cut its dividend once, and it was a big deal: The decision came after Meredith Whitney, another banking analyst, published a controversial report suggesting the dividend was at risk.
Now, some analysts believe that it may be time to scrap it all together. They see little economic sense in Citi raising cash and selling assets at fire-sale prices, just to turn around and send the money out the door in the form of a dividend — money that might be better used as a buffer against future losses in a liquidity crunch.
Defending the bank’s position on the dividend, Gary Crittenden, Citi’s chief financial officer, told Mr. Mayo on Friday that the dividend payments are based on the bank’s underlying earnings power, not on its current performance.
Mr. Crittenden cited a litany of ways the bank has cleaned up its act, allowing itself to continue making dividend payments despite repeated quarterly losses and a gloomy economic outlook. It has cut staff, increased productivity, expanded its presence in growing markets and built up a reserve to protect against future credit losses.
Richard Bove, an analyst at Ladenburg Thalmann, said that according to his calculations, Citi needs to earn about $2 billion each quarter in order to pay its dividend. But Citigroup has lost money in the last three quarters and is projected to continue doing so.
Mr. Bove argued that requirements imposed by the Controller of the Currency would force Citi to cut its dividend if it loses money for eight consecutive quarters — and, accordingly, he wanted to know if Citi was projecting a profit in the next five quarters.
Mr. Crittenden declined to speculate about whether or not the bank would report a profit but reiterated that the bank’s earnings power is strong.
And what of Ms. Whitney, the analyst who correctly predicted Citigroup’s previous dividend cut? She believes that it will have to do it again.
According to her estimates, Citigroup will lose $2.15 per share this year because of the economic slowdown and more write-downs on its assets. Ms. Whitney, who now works at Oppenheimer, recently wrote in a note to investors, “How anyone, let alone [Citigroup’s] management and the board, can believe that [Citigroup’s] dividend is safe given this earnings scenario is beyond our comprehension.”
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Here are some FY projections made from Q2:
Standard & Poor's equity analysts on March 4 lowered profit expectations for Citi to earnings of $1.05 per share for the full year, from $2.99. And Goldman Sachs changed its first-quarter estimate to a loss of $1 per share, from earnings of 15 cents, attributing the change to a math error.
Oppenheimer's Meredith Whitney, one of the Citi's most pessimistic (and, so far, correct) analysts, thinks Citi could be forced to sell up to $100 billion in assets. That's difficult to do while markets suffer from credit turmoil.
"Under duress, (Citi) will likely be forced to sell what it can and not what it should," Whitney wrote Feb. 25. She also worries Citi may need to again cut its dividend -- after the stock's recent decline the dividend yield stands at a relatively generous 5.4%.
Though analysts aren't questioning Citi's long-term survival, few expect an easy road ahead, especially if the credit crisis doesn't ease and loans continue turning sour.
As Credit Suisse analyst Susan Roth Katzke wrote recently, "This is no easy fix, even for the best of managers."
But how bad could things really get? After all, Citi stock is already trading at the lowest level in recent memory. Citi's stock closed down 4.3% to $22.10 per share on March 4 after hitting a 52-week low of $21.23 during the trading session. Shares have lost 57% of their value over the past 12 months.
Keefe, Bruyette & Woods analyst Diane Merdian recently calculated a "worst-case scenario," which she places at a 10% probability of occurring: If Citi had to write off all of its subprime and other risky debt, it would take a $32 billion pretax hit, she figures, and Citi might need to raise $20 billion more in capital. That could cut Citi's share value to $15.19.
That's another hit of more than 30%. Investors may continue running away from Citi's stock until they get signals -- either from the credit markets or from Citi executives -- that their worst nightmares won't come true.
This article was reported and written by Ben Steverman for BusinessWeek.
