This brings me to the final risk, greater and harsher regulations. After the financial crisis new regulations such as Dodd-Frank imposed stricter limits on the banking business. Now many of these changes, such as higher capital ratios (i.e. lower leverage), were needed to minimize the chances of another collapse and taxpayer bailout.
However, the same increase in Tier 1 capital ratios that is a sign of a stronger balance sheet also means that the bank can’t lend out those reserves, resulting in lower profitability; especially if interest rates continue to remain low.
Another regulatory risk is to the dividend itself. This is a result of the big banks now being overseen by the Federal Reserve, who must sign off on their annual capital return plan to shareholders.
In other words, if Citigroup’s annual Stress Test results, which simulate another great recession to see how the bank would fair, don’t go well, its ability to increase its dividend, or even pay one at all, might disappear.
Of course we can’t forget to mention the ultimate doomsday scenario for the big banks: the return of Glass-Steagall, which would effectively break them up.
The Wells Fargo fraudulent account scandal has only inflamed public opinion against large banks. And while an actual return of Glass-Steagall isn’t likely to pass Congress, the potential for a break up of “too big to fail” banks is something investors must always keep in mind.
Dividend Safety Analysis: Citigroup
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Citigroup’s dividend and fundamental data charts can all be seen by clicking here.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.
Citigroup Inc (NYSE:C) has a Dividend Safety Score of 76, suggesting that the company’s dividend is very safe despite Citigroup’s less than stellar history of banking profits, which include: major losses in the 1980’s from emerging market bonds, commercial real estate losses in the 1990’s, and of course its brush with death in 2008, Citigroup’s current dividend is actually pretty secure.
The strong Dividend Safety Score is due to Citigroup having by far the lowest payout ratio of its peers: Citigroup 7%, Bank of America 18%, JPMorgan Chase 32%, Wells Fargo 37%.
However, that isn’t necessarily due to management wanting to be especially conservative, but rather because the Federal Reserve just allowed it to raise its dividend for the second time since the financial crisis.
In other words, because Citigroup was the most at risk bank, only after six long years of turnaround efforts did regulators finally believe it was safe enough to increase its token payout.
However, one must give Citigroup its due. Management has done a stellar job in creating a fortress like balance sheet that is only getting stronger with time. That could help the Federal Reserve grant the bank permission to increase next year’s capital return program, up from $6 billion this year. Most of that will come in the form of buybacks, but dividend investors should still see a nice boost as well most likely.
