Citigroup (C) cuts dividend 41%, but I still expect overall growth

Posted by: Howard Silverblatt on January 15, 2008

The potential for a large dividend cut by C, the third largest payer in the S&P 500 at $10.8B, has been known and discussed for months. Today’s 40.7% dividend reduction (from quarterly $0.54 to $0.32) by C, reduced its yield from 7.4% (8th highest) to 4.4% (43rd highest), shaved $0.50 (1.75% of the payment) off the S&P 500 dividend rate, and reduce the overall S&P 500 yield from 2.02% to 1.99%. C is now the 6th largest payer ($6.4B), with the Financial sectors dividend contribution being reduced from 29.10% to 27.84% (it was 29.72% in June of 2007).

The tendency for index issues to pay and increase their cash dividends is much greater than that of the general market, with 77.8% of the S&P 500 constituents paying cash dividends versus 38.7% for the non-S&P 500 companies. For 2007, over 60% of the S&P 500 increased their dividend payout compared to less than 28% for the non-S&P 500 companies.

In aggregate, S&P 500 Industrial (Old) issues continue to have strong cash positions, equating to 65 weeks on net income (including discontinued operations) classified as cash and equivalent. Third quarter cash flow was positive, and fourth quarter earnings estimates (which exclude all the financials) are projected to increase in excess of 10%. P/Es also remain relatively low as measured by trailing 12-month EPS or projected 2008. As of yesterdays close there were 70 Industrial issues projected to post at least a 15% fourth quarter gain in Operating earnings, with a 2008 P/E of under 15.

While I continue to have concern over the deterioration within the Financial sector, I believe the vast majority of S&P 500 companies will continue their long history of dividend payments and increases in 2008. I am therefore maintaining my 9.3% estimated growth rate in actual cash dividends paid in 2008 over that of 2007.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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