Should You Buy Google and Citigroup in Anticipation of Big Dividend Payouts?

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If you are under 55 and still holding a portfolio heavy in fixed income products, you have probably been advised to go shopping for some big, dividend-paying stocks. That’s the go-to wisdom from many investment advisors lately for clients who need relatively low-risk alternatives to bonds, and it’s a key reason that shares of old-fashioned companies like Proctor & Gamble (PG) and Johnson & Johnson (JNJ) have done very well this year. But we’d like to offer a couple of possibilities that your financial planner probably didn’t mention: Citigroup (NYSE:C) and Google (GOOG).

These companies get screened out in the large-cap dividend hunt because they don’t pay meaningful dividends. Yet. Citigroup paid solid dividends pre-financial crisis, and it has made clear it wants to do it again. Google has never paid a regular dividend on common shares and has given no indication of any plans to start, but Wall Street seems certain it’s just a matter of time before it does. Meanwhile, the investment community loves shares of both companies, as seen in a stock chart.

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C Chart

Citigroup, for example, carries about six times as many buy and overweight ratings on its shares as anything else. Its shares also were one of the top two purchases by hedge funds last quarter, according to a Goldman Sachs report. At least 9 prominent value funds make it more than 2% of their portfolios, according to dataroma.

As a recipient of a huge taxpayer bailout, Citigroup has to get regulatory permission to raise its dividend or institute share repurchases. Last year, the company embarrassed itself by all but promising higher payouts only to be denied permission. With a new CEO in place, the company played it safe this year by restricting its request to a $1.2 billion share repurchase program, for which it was granted permission last week. It gets the opportunity to ask for higher dividends again next year.

Financial stocks are traditional sources of decent dividend payments, and investors expect Citigroup to return to that distinction next year. They look to Wells Fargo & Co. (WFC) for inspiration, which was allowed with last week’s review to increase its dividend payment 20%. That will bring its dividend yield to about 3.2% at today’s prices, yet its payout ratio will still be below pre-crisis norms, suggesting more room to raise the dividend.

Risks to a Citigroup dividend increase are mainly the same regulatory issues that affect the entire sector. There’s much worry now that the banks really are too big to control, along with political rumblings calling for break-ups. While few believe Congress has the skill or the desire to orchestrate that, tighter regulations that limit the ways banks can make money are entirely possible. (Remember last year’s limits on debit card fees.)

Meanwhile though, Citigroup has done as the regulators instructed; built up capital as a protection against potential problems.

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C Tangible Common Equity Ratio Chart

Wall Street feigns outrage over Google’s lack of dividend on a fairly regular basis. Why can’t a $265.59 billion market cap company with some $48.09 billion in cash and short-term investments share? The YChart Stock Screener shows only three other companies with $100 billion-plus market shares that don’t pay dividends; Amazon.com (AMZN), Berkshire Hathaway (BRK-B) and Columbian oil company Ecopetrol S.A. (EC).

Shareholders finally persuaded Apple (AAPL) to initiate a regular dividend in similar circumstances last year, and that one now pays a 2.5% yield.

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GOOG Cash and ST Investments Chart

Google, however, has managed to keep shareholders pacified with share price increases that steadily doubled S&P 500 gains this year as well as the past six or twelve months. It is the most widely-held investment by large mutual funds. And unlike Apple, for which analysts forecast relatively flat earnings this year, Google is expected to raise its earnings per share some 14%. While a dividend may be inevitable, it isn’t necessarily imminent.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.


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