Can Pandit Cut Citi's Dividend?

In the WSJ report on Citi shoring up its capital base, we're told that a dividend cut is now a real possibility:

The board of Citigroup is expected to meet on Monday, a day before it reports earnings, and to discuss cutting the firm's hefty dividend in half. This could save more than $5 billion a year. Citigroup has repeatedly said its dividend was safe. But Vikram Pandit, its new chief executive, is seen as more willing than his predecessor to take radical steps.

Named: Vikram Pandit. Not named: the board's chairman, Win Bischoff, or the chairman of the executive committee, Robert Rubin. Remember that dividend decisions are made by the board and not by the CEO. But the fact is that the CEO is one of the 15 board members, and one imagines that if Pandit is strongly in favor of a dividend cut, the rest of the board will go along with him.

That said, however, one also wonders what the point is of splitting the jobs of chairman and CEO if the CEO still gets a seat on the board and has de facto ability to make decisions on things like dividends. What's left for the chairman to do?

It'll definitely be interesting to see how the stock market reacts to any dividend cut. In case you didn't notice, the stock of MBIA tanked on Wednesday after the bond insurer said it was cutting its dividend, before recovering on speculation of a rescue from Warren Buffett. Sam Jones is puzzled by the stock-price action:

If you had shares in MBIA and you were smart, why on earth - having held on this long - would you suddenly sell having heard that, oh, actually, the bond insurer wasn't going to collapse over the next fortnight like everyone said it would. But wait - horror of horrors - now you're only going to get a dividend worth 13 cents a share, not 34!

Evidently there are a lot of investors who Really Care about dividends. I'm on the record advocating that Citi cut its dividend, but I'm not at all convinced that such a move would come without negative consequences for the share price. Still, Citi's share price has now sunk so low that the dividend yield has hit 8%. And given the tough operating environment that Citi faces in 2008, I just don't see how the board can justify paying out 8% of the bank's market capitalization to its shareholders, rather than using that money to shore up a rapidly-shrinking capital base.

By the way, Citi is currently trading on a multiple of 1.08 times book value. When it releases its fourth-quarter earnings next week, that ratio should rise, if only because the write-offs are going to mean that its book value has fallen. Even so, the bank is still getting dangerously close to following Bear Stearns into trading on a price-to-book ratio of less than 1.