Tuesday’s injection of capital by the Federal Reserve triggered a 417-point rise in the Dow but has been forgotten as the index is now roughly where it was at the start of the week.
For businesses and individuals whose loans are coming up for renewal it’s an extremely nervous time. Even the healthiest companies use some debt to increase the rate of return to their shareholders. (If the business can borrow at 4% and invest at 8-10%, any CFO would have been derelict in his responsibility if he didn’t employ some leverage.) But some healthy ones are caught short by untimely maturities during a credit crunch.
Financial stocks are approaching the point where I can’t resist nibbling. For example, Citigroup (C), which I don’t currently own, is selling for less than $20 per share. Its dividend of $1.28 means that an investor could pocket over a 6% yield while waiting for the stock to recover. Even if the dividend is cut by a third to put the yield at 4%, that still beats the 10-year Treasury rate of 3.4%.
I don’t think we’ve hit bottom yet, so there’s not an immediate urgency to buy Citigroup, Bank of America, JP Morgan, or Wells Fargo. But don’t wait too long; run your numbers, then put in a good-till-canceled order with your broker and sleep well knowing that you’ve bought a company that's too big to fail at a price that will look cheap five years from now. © 2008 Stephen Yuen
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