Value Investing News

* Yahoo! Finance reported on Citigroup's continued fall today, as CEO Chuck Prince resigned and slithered away in shame, the bank announced it would take an addition $8B - $11B in charges from bad debts, and uncertainty remains over the status of yet more debt instruments that don't show up on its financials, but for which it is still on the hook.  Though this posting is not primarily about valuation, I thought it might be useful to consider the following. On the high end, the upcoming charge may be $11B.  Multiplying C's current $2.16 dividend by the 4.97B shares outstanding, we see that the bank pays out about $10.7B per year in dividends.  If you owned the entire bank, you could essentially but the dividends for one year and pay for this recent chunk of bad debt.  Whether the bank will do this or not is up in the air; the price of the company would almost certainly take a hit.  But again, if you owned the whole bank, you may well decide to do that to raise cash and pay off some debts, and then resume dividends in the future, once the balance sheet was restored (presumably under some competent leadership).  This course would prevent you from selling off assets to pay for the problems.  While many would initially prefer to sell off assets instead, keep in mind that a financial institution's assets are, of course, financial instruments.  And, trouble in the financial instruments markets are causing the troubles in the first place.  So, you'd be selling assets for a few cents on the dollar (probably to someone who would hold them, sell them later, and crow about having taken you for a fool).

* Suppose that things were pretty bad and C suspended its dividend for three years.  Then, in 2011, the Prince-era nonsense paid for, suppose C resumed payment of the current dividend and also resumed its history of steadily increasing the dividends (increases of 10% is a fairly conservative number if the past is any indication of C's dividend payment inclinations).  You'd be buying a fairly substantial dividend stream, given the current price (which will only be further decimated should the company actually discontinue dividend payments).  There are a lot of "supposes" and "perhapses" implied in the above discussion, which is part of the investing territory.  But, because banks are known for paying dividends, (and here's the point of this post), there may well be a time coming when an old-fashioned dividend discount model can be applied to banks.  It was Rothschild who said to buy when blood was running in the streets, and that time may be coming fast.