Strong Capital Position Helps Citigroup Secure Fed’s Permission For $10.4 Billion Capital Return Plan
Late last week, Citigroup (NYSE:C) lived up to the high expectations investors had from its 2016 capital return plan by announcing its intention to return as much as $10.4 billion to shareholders over the next four quarters. [1] The geographically diversified banking giant, which was the only U.S.-based bank holding company to have its capital plan rejected by the Fed on two previous occasions (2012 and 2014), did not have any trouble in clearing the Fed’s stress tests this time around (see Lots Of Winners In The Fed’s 2016 Stress Test, But Deutsche Bank, Santander Stumble Again). As we pointed out in our article How Do The Largest U.S. Banks Fare In Terms Of Meeting Core Capital Ratio Targets?, Citigroup has one of the highest core capital ratio figure among U.S. banks – something that played a role in the bank securing the Fed’s approval for its capital plan.
The proposed plan entails an increase in quarterly dividends from 5 cents a share to 16 cents a share, and total share repurchases of up to $8.6 billion. Given the bank’s roughly 2.9 billion outstanding shares, the 2016 capital plan entails a payout of $10.4 billion to investors over Q3 2016 – Q2 2017.
We maintain our $60 price estimate for Citigroup’s stock. Our price target is about 40% higher than the current market price due to the sharp sell-off in bank shares over recent months in anticipation of the U.K. leaving the European Union, as key economic indicators point to weak growth figures in the near future.
See Our Full Analysis for Citigroup’s Stock Here
Citigroup was known for handing out handsome dividends in the pre-2008 era, with total dividends of more than $9 billion each year between 2005 and 2007. Dividends were slashed in 2008 and were completely stopped until Q1 2011, after which they were increased to the token figure of one cent per share each quarter. They remained at that level for fifteen quarters, and were finally boosted to 5 cents in Q2 2015. Dividends are now set to increase more than three-fold to 16 cents per quarter beginning in Q3 2016.
The table below summarizes Citigroup’s capital return figures for each year since 2005 and has been compiled using figures reported in annual reports:
Notably, Citigroup initiated a share repurchase program in 2013 for the first time since the economic downturn. An important reason for the move was the substantial discount at which its shares were trading to its book value. As the bank’s shares continue to trade well below its price-to-book ratio, the decision to return more cash to investors through a share repurchase in 2016-17 too makes sense.
As Citigroup paid $0.05 in dividends per share over the first two quarter of 2016, and proposes to pay $0.16 per share over the remaining two quarters, total dividends for the year should be $0.42 per share. This works out to total dividends of around $1.2 billion for the year, assuming the total number of share outstanding remains constant at the current level of 2.9 billion. Also, the bank repurchased $1.5 billion in shares over Q1 2016 and had authorization in place to repurchase an additional $1.3 billion for Q2 2o16 – taking the total repurchase figure over the first half of the year to $2.8 billion. Taken together with $4.3 billion in proposed purchases for the rest of the year (half of the total proposed repurchases of $8.6 billion), this points to total share repurchases of $7.1 billion in 2016.
We represent dividend payouts and share repurchases in our analysis of Citigroup in the form of an adjusted dividend payout rate, as shown in the chart below. Note that we represent this payout rate as 0% in the chart for 2008 and 2009 as the figure was not meaningful. You can understand how a change in Citigroup’s adjusted payout ratio affects its share value by making changes here.
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- Citi Announces 2016 Planned Capital Actions, Citigroup Press Releases, Jun 29 2016 [↩]