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Citigroup Slashes its Dividend, Whitney Nails It

Written By Brian Hicks

Posted January 15, 2008

Death threats and mockery. That’s what greeted CIBC analyst Meredith Whitney when she had the gall to move Citigroup Inc. (NYSE:C) to "sector underperform" in October.

The reasons, of course, for that ire were pretty simple.

Ms Whitney’s call devastated the shares of the financial giant sending them down by as much as 7% in the session following her call. Moreover, it was a call the helped to push the down by 360 pts or 2.6% the same day.

That–fittingly enough-was on Halloween, and it’s been nothing but tricks for the company ever since. Shares of Citi have fallen by some 34% since then, a shocking number for one of the world’s biggest financial players.

In a note to her clients that day, Ms. Whitney suggested that Citi was a growing train wreck since the ratio of the company’s tangible equity to tangible assets fell to 2.8 percent, the lowest in decades and half the average for its peer group.

As such, she said, Citigroup may have to cut its dividend, raise cash or sell assets to raise more than $30 billion to shore up its capital.

In short, it was a gutsy call to say the least, even though it came only two weeks after the company reported a 57 per cent drop in its third-quarter profits, following a $6.5 billion writedown. Not many people, after all, were willing to take on Citi in such a manner.

"But," said Whitney, "it was the most straightforward call I’ve made in my career and I am surprised my peer analysts have been resistant. It’s so straightforward, it’s indisputable."

Some 10 weeks later, however, Ms. Whitney’s share crushing analysis has been completely validated. She nailed it.

Citigroup is indeed desperately moving to sell itself off in a bid to raise capital, and its all important dividend has been slashed by nearly 41%. On top of that, the company revealed today that it posted the biggest loss in its 196-year history, losing almost $10 billion in the last three months of 2007 alone.

Here the full story on the debacle in The New York Times. It’s an article by Eric Dash entitled: Citi Posts $9.83 Billion Loss, Will Cut Jobs

"Citigroup announced a steep cut in its stock dividend and another big investment by foreign investors on Tuesday after taking more write-downs related to subprime securities and posting a $9.83 billion loss for the fourth quarter.

Beginning what is expected to be a grim week for financial company earnings, Citigroup said it was writing down $22.2 billion because of soured mortgage-related investments and bad loans. The bank is also cutting its dividend by 41 percent and obtaining a $12.5 billion cash infusion to strengthen its balance sheet, including big investments by its former chairman, Sanford I. Weill, and the Government of Singapore Investment Corporation. Facing rising expenses and deepening losses, Citigroup is expected to embark on a major cost-cutting campaign that could result in at least 4,000 layoffs. And thousands more could be in the offing in the coming months.

The write-downs caused Citigroup to swing to a loss for the fourth quarter. The fourth-quarter loss translated into $1.99 a share, compared with a profit of $5.1 billion, or $1.03 a share, in the period a year earlier. Revenue fell 70 percent, to $7.22 billion from $23.83 billion. The write-downs included $18.1 billion from a sharp drop in the value of mortgage-related securities and heavy trading losses. The company also set aside an additional $4.1 billion to cover expected losses from bad loans.

For the full year, Citigroup reported that net income dropped 83 percent, to $3.62 billion, or 72 cents a share, compared with 2006 profit of $21.53 billion, or $4.31 a share. Revenue fell 9 percent, to $81.7 billion in 2007.

Once one of the world’s mightiest banks, Citigroup’s capital levels have been severely depleted in the fallout from the continuing credit crisis and worsening downturn in the housing market. Even with the $12.5 billion capital injection, analysts think that the bank may need even more money to shore up its balance sheet if economic conditions worsen.

"The board has been behind the ball, no doubt about it," said Meredith A. Whitney, a banking analyst at CIBC World Markets, who has called on Citigroup to cut its dividend. ‘This is a company with serious capital shortfalls. The balance sheet should be the first thing that should be looked at for a bank, not the last.’"

Of course, It all seems so simple now doesn’t it?

But the people that are content to support the status quo are legion, while the people who dare to speak truth to power are few.

Great call Meredith.

BTW: Here’s a chart of Citi since that Halloween call.