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By: John Spence, Dow Jones Business News
Date: January 7, 2008

Stock investors could see dividends continue to dwindle this year in another stark reminder of the fallout spreading from the shakeout in credit and financial markets. Among companies that pay dividends to shareholders, 1,857 increased the payout last year, but that's down about 6% from 2006, according to the index research group at Standard & Poor's. Apart from the turmoil in credit markets, lower dividend increases reflect "the current trend of favoring stock buybacks at the expense of committing to long-term cash dividends," said Howard Silverblatt, senior index analyst at S&P. For the fourth quarter of 2007, dividend increases declined 11% to 432 from the 483 recorded during the year-ago period. Overall, the number of dividend payments last year rose by 2%, but declined in the fourth quarter by 1%, according to S&P. The research provider also found that negative actions -- such as dividend decreases and suspensions -- picked up in 2007 amid heightened concern over the difficulties within the financial and consumer discretionary sectors. More income-oriented investors, such as those approaching or in retirement, have turned to the stock market in recent years due to anemic bond yields. Fewer dividends means they pocket less cash and see lower overall returns from their stock portfolios. Meanwhile, recession fears were raised this week after a report showed the U.S. unemployment rate shot up to 5% in December as job growth stalled, a sign that the labor market is stressed as the economic slump spreads. Some investment banks and financial-services companies hardest hit by the credit tumult are scaling back or phasing out dividends in a bid to retain capital. National City Corp. (NCC) got its turn in the spotlight this week when the bank said its board voted to slash its quarterly dividend in half. The company also said it had laid off 900 workers and would bolster capital as it became the latest to detail its exposure to the subprime-mortgage debacle. Last month, Washington Mutual Inc. (WM) announced plans to exit the subprime-lending business, cut jobs and shore up its financial position by slashing its dividend by over two-thirds and selling preferred stock. Now, Wall Street giant Citigroup Inc. (C) is in the crosshairs as it prepares to report fourth-quarter earnings that were likely badly mauled by worsening credit markets. Analysts say the company may be forced to cut its dividend or take other financial measures, such as selling assets to offset what could be billions of dollars in fourth-quarter write-downs on mortgage-related holdings. Citigroup is scheduled to report quarterly results before the markets open on Jan. 15. The company's shares lost about 45% in 2007 as financials stocks shouldered the brunt of the credit pain. Citigroup's per-share earnings "should be significantly lower in the fourth quarter compared to the previous quarter, reflecting [between $8 billion and $11 billion] in pretax write-downs associated with structured products backed by subprime-mortgage assets," wrote Deutsche Bank analysts in their earnings preview. The company also likely suffered from the acceleration of credit losses, particularly in U.S. mortgage activities, and capital-markets weakness in general, they said. Citigroup's third-quarter net income slipped 57% from a year earlier to $2.38 billion, or 47 cents a share. Analysts polled by Thomson Financial are forecasting a fourth-quarter loss of 78 cents a share, on average. In November, Citigroup got a $7.5 billion injection from the Abu Dhabi Investment Authority, and other banks continue to look to overseas investors for additional cash. "Given the recent dividend cuts by National City and Washington Mutual, we have come to the conclusion that a dividend cut by Citigroup is well within the range of possibilities," wrote Morningstar Inc. analyst Ganesh Rathnam in a Jan. 4 research note. "Our fears for the dividend result from Citigroup's excessive leverage at a time of large but yet unknown write-downs." Still, the analyst wrote he'd rather see management slash its dividend for the next few years to conserve capital than issue additional equity at distressed prices. "The former event is a temporary measure that ensures the bank's survival; the latter, while doing the same, dilutes current shareholders permanently," Rathnam said.

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