NEW YORK (AP) – Citigroup Inc. shares dropped to a four-year low Thursday as investors' simmering worries about overly leveraged debt, defaulting mortgages and the overall health of the consumer boiled up again.
The stock fell $2.85, or 6.9 percent, to $38.51 Thursday after CIBC World Markets analyst Meredith Whitney wrote in a client note Citigroup might need to cut its dividend to raise capital. The only thing keeping Citigroup stockholders' returns from lagging inflation over the past several years has been its dividend.
Some analysts called the prediction hasty — Banc of America Securities analyst John McDonald said a dividend cut “appears extreme at this point,” and Buckingham Research analysts said it “seems highly unlikely.”
But Whitney was not the only one pessimistic about Citigroup on Thursday. Morgan Stanley analyst Betsy Graseck downgraded Citigroup and other large banks, saying she believes “there will be contagion from subprime housing to prime housing to auto to card loans.” Credit Suisse lowered its Citigroup rating as well.
Citigroup, which declared a 54-cent dividend Oct. 16, would not comment on the analyst notes.
The financial sector Thursday contributed to much of the Dow Jones industrial average's 362-point drop. In addition to a slowing economy, investors expect additional writedowns on products like collateralized debt obligations and structured investment vehicles at Citigroup and other banks — some of whom have been trying to create a fund to buy distressed securities.
“In anticipation of some of the potential issues that Citigroup has around the SIVs, we have reduced our holdings” in recent weeks, said Matt Zuck of SKBA Capital Management. “Once you have Citigroup working with the government and with other financial institutions to restructure part of their business, it makes sense that a dividend cut could be on the table.”
Defaulting subprime mortgages and bad bets in the credit markets led to 57 percent tumble in Citigroup's third-quarter profit and losses at other banks and brokerages. Citigroup Chief Financial Officer Gary Crittenden said Oct. 15 it would not buy back stock — another way of increasing shareholder value aside from dividends — until debt-to-cash ratios improved.
Bank of America Corp., which CIBC also downgraded, fell $2.57, or 5.3 percent, to $45.71.
Even JPMorgan Chase & Co., which reported a quarterly profit rise last month, fell $2.68, or 5.7 percent, to $44.32.