Friday, February 28, 2014

What about Citi's Dividend?

Citigroup, Inc.  (“C” $49)

Citigroup is a familiar company to most people.  New York based, long history, global footprint.  However, it’s suffered mightily over the last five years when it slid into the penalty box during the financial storm of 2008.  To an extent, Citigroup remains there today and the signs of disfavor are easy to point out: a PE valuation below 10x (FYF), a substantial discount to tangible book value, and a persistent level of attention from bank regulators. 

To the point, we see some light on the horizon and think that investors should recognize both the changes that have been made and will be made.  To start with, leadership has improved.  We like a Board that is chaired by Michael O’Neill and recognize him as a banker with decades of experience and a record of success.  Further, we are confident that Michael Corbat will guide the company through the structural changes that will bring better focus and better financial results. 

Speaking about change, one should be asking the question, “Will Citi’s dividend jump soon?”  We think yes and consider “C” as an interesting play for dividend growth investors.  Some thoughts:

·         Current annual dividend of $0.04

·         Current dividend yield of 0.08%

·         Current payout ratio (TTM) of 0.91%

·         Dividend Coverage ratio (TTM) of 9,975%

The comparatives are interesting as well.  A quick review illustrates the fact that Citigroup has been held back due to its need to shore up its capital position and has lagged peers in a big, big way:

Dividends Paid (TTM)
 $       0.03
 $       0.04
 $       1.44
 $       1.15
Annual Yield %
Payout Ratio (TTM) %
Coverage Ratio (TTM)



The company has been using recent earnings for share repurchases and, given their discount to book, this seems logical.  Moreover, all banks are obligated to seek approval from the Federal Reserve prior to any share repurchases and dividend payments (Federal Reserve’s Comprehensive Capital Analysis and Review Plan) and the bank has been moving their Basil III capital position close to the 10 percent target.  Again, we keep asking the question, “Will Citigroup’s dividend jump soon?”  Others are raising this question and have taken both sides: the WSJ and Motley Fool for example. (1) (2) 

Our bet is that they move it up this year and for several years to come.  We estimate a future dividend payout ratio that is closer to 30% and, based on $4.98 estimate for 2014, this would translate to an annual dividend payment of $1.50 or better.  As such, we bought our first shares this week.   

(1)   WSJ "Heard on the Street"  David Reilly  January 6, 2014
(2)  Patrick Morris  November 29. 2013

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