Citigroup Likely Could Have Done Better Than Its $22 Billion Capital Return Plan

Late last week, Citigroup (NYSE:C) detailed plans to return as much as $22 billion to shareholders through dividends and share repurchases over the next twelve years, after the Fed approved the capital plan as a part of the 2018 stress test for banks. While the diversified banking giant’s plan for this year is 16% larger than the $18.9-billion plan announced last year, and marks the biggest capital return plan by Citigroup in its history, the plan still looks relatively conservative.

This is primarily because the bank cleared the quantitative round of the stress test with a comfortable capital buffer under the severely adverse scenario, and it likely could have gotten the Fed to sign off on a payout roughly $4.5 billion higher (or a total of $27 billion). We arrive at this figure by a back-of-the-envelope calculation using the bank’s risk-weighed asset base at the end of Q1 2018 ($1.18 trillion), and the 40 basis point capital buffer the bank had under the severely adverse scenario. That said, Citigroup’s decision to stick to a conservative plan makes sense, given that it holds the dubious record of being the only U.S.-based bank holding company to have its capital plan rejected by the Fed on two occasions in the past (2012 and 2014).

The proposed capital return plan includes a 41% hike in quarterly dividends, from the current level of 32 cents a share to 45 cents a share, which works out to total dividends of over $4.4 billion assuming average outstanding shares of 2.45 billion. Taken together with the new $17.6 billion share buyback program, this equals the record $22 billion payout. We capture the trends in Citigroup’s dividend payouts as well as share repurchases over the years in an interactive dashboard, along with our forecast for these key metrics.

We are currently in the process of updating our price estimate for Citigroup’s stock to factor in the impact of the strong capital returns for the year.

Historical Payouts

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 increased more than three-fold to 16 cents per quarter beginning in Q3 2016, and are now expected to double to 32 cents per quarter from Q3 2017.

Over the last ten years, Citigroup has returned $42.2 billion in cash to common shareholders, an average of $4.2 billion a year – representing about 130% of its average retained earnings of $32.4 billion for this period. Note that this includes losses of around $30 billion and $9 billion in 2008 and 2009 due to the downturn, and a loss of $7.5 billion in 2017 due to one-time charges linked to the new tax act. Notably, Citigroup’s dividend payout over 2008-17 was just $10.8 billion compared to share buybacks of $31.4 billion – indicating a preference for returning cash to investors through share repurchases. This makes sense, given that the bank’s shares have traded at well below its price-to-book ratio over recent years (the P/B ratio is currently hovering around 80%).

The chart below details Citigroup’s total shareholder payout for each year since 2012, and includes our forecast for the next four years.

As Citigroup paid 32 cents per share in dividends over each of the first two quarters of 2018, and is expected to pay 45 cents per share over the remaining two quarters, total dividends for 2018 should be $1.54 per share. This works out to a dividend payout of around $3.9 billion for the year, assuming the total number of shares outstanding remains around 2.5 billion. Also, the bank had authorization in place to repurchase up to $4.6 billion worth of shares at the end of 2017, which we expect the bank to exhaust over the first half of the year. Taken together with $8.8 billion in proposed repurchases for the rest of the year (half of the total proposed repurchases of $17.6 billion), this points to potential total share repurchases of $13.4 billion in 2017.

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. You can understand how a change in Citigroup’s adjusted payout ratio affects its share value by making changes here.

If you don’t agree with our forecast, you can come up with your own by making changes to our interactive dashboard for Citigroup’s dividend payout and share repurchases.

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