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November 27, 2007
The Dilution Solution
An 11% yield on a 195-year old U.S. financial mammoth that is basically too big to fail? Sounds good. So good in fact that the Abu Dhabi Investment Authority is going to invest $7.5 billion in the idea…
With all three major U.S. indices down by more than 10% from their October highs yesterday, the Citigroup/Abu Dhabi news was enough to spark a relief rally today. By the close Bloomberg’s top headline read ‘Stocks in U.S. Rebound on Citigroup Cash Infusion’, and TheStreet was saying ‘Citi Deal Ignites Rally’.
Ironically, of the few groups of people not excited by the Citigroup induced relief rally was Citigroup shareholders. Not only did Citigroup shares close lower today, but at least one analyst wasn’t excited by the news: ‘CIBC World Markets said she still expects Citigroup to cut its dividend and sell assets to deal with its cash constraints.’ (S&P)
In other words, while diluting future shareholder returns via a desperate and highly priced equity offering is good news for the markets, it is not necessarily wonderful news for the company doing the diluting.
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