The Fed’s Stress Test & Citi: $3B TruPS Redemption Bolsters $1.2B Stock Buyback Plan
Citigroup (NYSE: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. [1] 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. [2] The fact that Citi is still playing it safe is evident when we compare these figures with those of rival Bank of America (NYSE: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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Notes:- Citi Statement on 2013 CCAR Planned Capital Actions, Citi Press Releases, Mar 14 2013 [↩]
- Citigroup Announces $3 Billion Redemption of Trust Preferred Securities, Citi Press Releases, Mar 15 2013 [↩]