Tuesday, July 22, 2008

Citigroup’s Dividend Debate

Citigroup’s (C) earnings supposedly beat the street estimates. But the street is debating if the already reduced dividend is safe. Citi is selling assets, slashing costs and taking the harsh medicine needed to restore itself to healthy status. But selling long term income producing assets just to pay a dividend and watch the cash leave seems incredibly short sighted.

You have to love the debate on dividends. But why do we have to wait until the patient is in the trauma unit before there some thought on the matter? Dividends are a sign of financial health. They are paid in cash to investors who take the risk. It is near impossible to fool around with the accounting. The dividend is declared and paid. That’s it. Frequently the dividend has a serotonin effect on investors creating a warm and mildly euphoric state.

Some analysts are asking if the continued dividend means that profitability is being forecast for the next five quarters. Of course they are asking about the Comptroller of Currency regulation requiring dividend suspension if eight straight quarters of losses have occurred. Citigroup can easily financially engineer a profit and break that cycle. So lets predict it will never be a factor.