Citigroup Inc., in a significant change in the way it rewards investors, declared a 75% increase in its dividend, a move that more companies are expected to follow as earnings announcements pick up this week.
Dividends, those quarterly payouts that investors and companies dismissed as irrelevant during the stock-market bubble, are back in vogue, driven by improving business conditions, investors seeking the relative safety of dividend-paying stocks and, perhaps most important, a tax cut that has made dividends more valuable to individuals.
"It's on everyone's mind, it's on everyone's calendar, you know it's in every boardroom," said Howard Silverblatt, a quantitative analyst at Standard & Poor's. "This looks like it's getting more attention than earnings."
Citigroup's annual dividend is jumping to $1.40 a share from 80 cents. While boosting its dividend, Citigroup, which also posted a 5% quarterly earnings rise, said it would cut back on share repurchases. It cited the new tax law, which makes dividends just as attractive as share repurchases, which are designed to boost stock prices and had become the most favored way for companies to return cash to shareholders. "This substantial increase in our dividend will be part of our effort to reallocate capital to dividends and reduce share repurchases," said Sanford I. Weill, Citigroup's chairman and chief executive.
Citigroup, the sixth-largest stock by market capitalization, said that the dividend increase will be funded with capital previously used to buy back shares. The dividend program will cost the company about $1.8 billion per quarter, up from about $1 billion before the increase. During the second quarter, the company spent $359 million buying back shares, down from $1.2 billion in the first quarter, to preserve capital for the dividend increase, according to Todd Thomson, the company's chief financial officer.
One of the largest beneficiaries of the dividend increase will be Mr. Weill himself, who owned 22.4 million shares of stock as of July 1. His annual dividend income will rise to $31.4 million, up from $17.9 million previously.
The Citigroup CEO's $13.5 million raise in dividend income will be tax-free, thanks to the generosity of the George W Bush tax cut. The simultaneous reduction in stock repurchases will likely have a long-term depressing effect on the stock price (at least in the absence of its stimulating effect), which will in turn keep a heavy lid on the upside potential of the stock price. While Weill cashes his check for $13.5 million in tax-free dividends, anyone with Citigroup stock in a 401(k) or brokerage account, which depend more upon the long-term increasing value of the stock rather than its dividend yield, will see a whole lot of nothing.
Now that one of every two Americans owns stock it is in the best interests of the ruling class to depress the stock market in order to maintain the distinction and hierarchy among the classes that keeps them on top. So even while they cash their dividend checks, they have moved on to hedge funds, timberland and Old Master paintings as core investments. Meanwhile, the little people are stuck with the stagnating stocks and mutual funds in their low-balance 401(k) accounts. The partial privatization of retirement income, defined as 401(k) plans, helps speed the net flow of capital away from workers and toward owner-shareholders.
Think Enron, played across the entire S&P 500. It's three-card monte played on a multitrillion dollar scale.
Sorry, retirement investor — you picked the wrong card. Tough luck.