Citigroup (
C
) has made some notable amends to its capital structure over the
last year as it continues to work hard to slash the non-core assets
held as part of Citi Holdings. As we highlighted in our article,
The Fed's Stress Test: Summary, Results And Implications
, the bank is now comfortably placed as the best capitalized
bank among similar-sized peers. No doubt, the capital strengthening
efforts received an additional push after the Federal Reserve
blocked Citigroup's plans to return cash to investors after its
stress test last year.
But this time around, the Fed really had no reason to
object to Citigroup's capital plan - which we believe was quite
conservative with a total outlay of $4.2 billion. The plan
includes a share repurchase of $1.2 billion over the year along
with the redemption of trust preferred securities (TruPS) worth
about $3 billion in April. The fact that Citi is still playing
it safe is evident when we compare these figures with those of
rival Bank of America (
BAC
) which will repurchase $5 billion of its shares and redeem
preferred stock worth $5.5 billion over the same period. Both these
U.S. heavyweights have decided to stick to their current dividend
payout of a cent per share each quarter.
We maintain our price estimate for
Citigroup's stock at just above $46
, in-line with the current market price.
Citigroup was known for handing out handsome dividends in the
pre-2008 era with total dividends at around $10 billion in 2006 and
2007. Dividends were slashed in 2008 and were completely stopped
until Q1 2011 after which they were increased to the token figure
of a penny per share each quarter.
The table below summarizes Citigroup's capital return figures
for each year since 2006 and has been compiled using figures
reported in annual reports:
|
(in $ mil)
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
| Common Stock Dividends |
9,772 |
10,742 |
5,794 |
249 |
- |
81 |
120 |
| Shares Repurchased |
- |
- |
- |
- |
- |
- |
- |
|
Total
|
9,772
|
10,742
|
5,794
|
249
|
-
|
81
|
120
|
Most notably, Citigroup will make a sizable share repurchase for
the first time in 2013 - a move that is most likely triggered by
the substantial discount its shares are trading to its book value
($61.57 per share at the end of 2012). The proposed $1.2 billion
share buyback plan will boost the effective payout figure for 2013
to around $1.3 billion, including the 4 cents in dividends that the
bank will pay for each share this year. We represent these payouts
in our analysis of Citigroup in the form of an adjusted dividend
payout rate shown in the chart below. As this payout rate was not
meaningful in 2008 and 2009, we represent it in the chart as
0%.
As for the plans to redeem four series of its trust preferred
securities in April for a total of $3 billion, the move comes with
a sound rationale. Taken together, these debt instruments carry an
interest rate of nearly 7%. So, with the redemption, Citigroup will
save on a good $200 million in interest payments for the year.
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