Dealing with a Falling Knife – Citigroup
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If you are like me and bought Citigroup as a core dividend holding then it is not too much fun at the moment. Have a look at this 3 month chart from the company:
That is one steep drop. The issue for the company is the subprime issues in the housing market, which lead to the very sudden departure of chairman and chief executive Charles Prince. That is never a good sign – something is obviously up (like $11 billion in losses). I don’t think this is the time to act on emotions and sell the stock though.
The reasons are best expressed by Michael Sivy of Money Magazine:
Basically, there have been a couple of episodes, starting with the Savings & Loan crisis almost 20 years ago, that were similar to what’s been going on recently. In those earlier cases, it took about six months for financial stocks to hit bottom.
So far, the big banks are generally above their August lows. The notable exception is Citigroup, which is having the most trouble, because its exposure is estimated to account for about a fifth of the outstanding SIVs. Other banks should have an easier time.
The good news is that once the past selloffs ended, financial stocks posted gains of more than 50 percent over the following two years.
Still, take your time about adding more financial stocks to your portfolio. There could still be some unpleasant surprises between now and early next year when final 2007 results are known. At that point, however, financial shares will actually be a lot less risky because the extent of their problems will be known and reflected in share prices.[bold emphasis mine]
I have made the mistake of selling into trouble before with Merck and am paying for it now, as the share price has sky rocketed. I will be watching closely, especially for dividend cuts or holding back dividend increases, but I don’t think it is the time to panic yet. In fact, the fact that the stock currently sports a 5.7% dividend yield with a 10 year dividend yield average of 2.3% suggests this stock is a screamin’ buy. However, I would hold off until the dust settles before making a buy decision. If you buy now and the stock continues to drop, you may become a long term investor whether you like it or not!
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10 Comments on this post
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investor99 said:
Interesting take on it.
I think the big question with C, BAC, and WM for that matter is:
Will they cut the dividend?
If you believe the odds of a cut are very low, then you should be barreling into the stocks at these levels, if you have the strategy that I do, and I think you do which is long-term dividend growth.
Why would you not buy up a 6% yield on C, unless you though the dividend was going to be cut. I guess another option is that you don’t think the dividend will be cut but you are holding out for a higher yield, which is also taking a risk, and guessing on share price movement.
The reason I bought BAC recently at $45 is because I do not think they will cut the dividend. That is really the only risk to buying it at these levels in my mind. If they do not cut then odds are in 5 – 10 years I will be looking at nice share growth, due to rising earnings and most importantly a floor, that is provided by a rising dividend.
November 6th, 2007 at 5:07 pm -
Dividends4Life said:
Investor99:
I had a 20% stop loss on C and thought it would never go off. It did…
WM has dropped 33% since mid-October. I am currently over-exposed to banks, so I will take this as an opportunity to diversify.
I too do not believe BAC will cut its dividend.
D4L
November 6th, 2007 at 7:16 pm -
The Dividend Guy said:
investor99 and Dividends4Life – thanks for the comments. I agree that the real risk is if the companies cut their dividends. I honestly have no idea if they will do this – however I would doubt it as well as the last thing they need to more negative market sentiment. However, we do not know what the earnings will truly look like and that will be the determining factor.
November 6th, 2007 at 8:34 pm -
Jude said:
Indeed if you head into the market when its still dipping, you might be a long term investor, then again, you’ll have to have the holding capacity to hold the stocks for a long time.
Thanks for the article! Stumbled across it and I was glad I found this one. Will be checking you out as much as I can
November 7th, 2007 at 12:48 am -
dong said:
I certainly don’t know if the banks will cut dividends, but the fact is they don’t cut them and need to just to avoid negative sentiment then the banks are doomed. Companies should never be managed just to prop up the stock price. If cutting the dividend in the short term can help the balance sheet overt the medium to long term then the banks should do it.
Ultimately I believe most of the banks will be fine. The question is when will that turnaround come, and what banks won’t be.
November 7th, 2007 at 9:18 am -
The Dividend Guy said:
Dong, good point. I agree that businesses should not be run with just the stock price in mind, but the reality it is what Boards are held accountable for. Payments of dividends also need to be made in the context of what is good for the business – I would expect that companies I own are managing their business that way.
I doubt dividends will be cut, but what about a slow down in dividend increases?
November 8th, 2007 at 10:37 am
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