Citigroup Inc. (C) has finally resumed dividend payment after over two years. Following the financial crisis, Citi had cancelled such payouts to retain capital. The company will pay a quarterly dividend of 1 cent per common stock on June 17, 2011 to stockholders of record on May 27, 2011.
In fact, in March, Citi had announced its intention to reinstate dividend payment following the 1-for-10 reverse stock split of its common stock that became effective after the close of trading on May 6.
The financial crisis, which led to significant losses at Citi and resulted in the company taking a huge bailout from the government to avoid failure, resulted in a major plunge in its stock price since late 2007.
Following the bailout, Citi was compelled to issue common stock to support its balance sheet that led to skyrocketing share count numbers. In an effort to conserve capital, Citi also stopped any capital returns to shareholders, either through dividend payout or share buyback.
The recent reverse stock split not only reduced the share count to 2.9 billion from 29.1 billion, it also removed the single-digit stock price stigma for Citi. In spite of positive developments like profit and balance sheet improvements, the Citi stock remained somewhat range bound and traded below $5.
The increase in the Citi price, though through cosmetic means, and the dividend reinstatement are ways to attract institutional investors as some institutions do not buy shares trading in single digits or refrain from paying dividends. Therefore, these are efforts to broaden the range of investors who would hold the Citi stock.
Comparison with Peers
However, in March 2011, following the stress test, Citi’s rival, JPMorgan Chase & Co. (JPM) increased its quarterly cash dividend to 25 cents per share leading to an annual dividend of $1 per share payable to shareholders. This represented a five-fold hike from the prior annual dividend of 20 cents per share.
Additionally, JPMorgan also announced $15 billion multi-year stock repurchase program, of which up to $8 billion of common stock buyback is approved for 2011. This share buyback program replaced the prior $10 billion program that had nearly $3.2 billion authorization still remaining.
On the other hand, Bank of America Corp.’s (BAC) plan to boost its dividend in the second half of 2011 was rejected by the Federal Reserve. It was a quite a shock to the company, since many of the Wall Street banks got the much-awaited green signal from the Fed to hike dividends, following the release of second round stress test results in March.
In fact, according to Fed, BofA has to increase its financial strength, in case it needs to battle another downturn. While the Fed has given it a second chance, allowing it to submit a revised capital plan, the rejection of the dividend plan surely stains investor confidence.
Our Take
We believe that meaningful capital returns to Citi shareholders, through increased dividends or share buybacks, are likely in 2012. Its core business, Citicorp, remains alluring and its unique franchise allows clients to access high growth foreign markets.
Though the top-line headwind continues at Citi, the continuation of the run down of its legacy problem assets would free up capital for the company and help invest in its core business. In addition, lesser exposure to private-label mortgage put-back risk is a positive for the stock.
Citi shares maintain a Zacks #3 Rank, which translates to a short-term Hold recommendation. Our long-term recommendation for the stock is also reiterated at Neutral.
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