Zacks.com Analyst Blog features: Citigroup Inc. (NYSE: C), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corporation (NYSE: BAC), Wells Fargo & Company (NYSE: WFC) and American International Group Inc. (NYSE: AIG).
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Here are highlights from Tuesday’s Analyst Blog:
Citi Plans Reverse Stock Split
On Monday, Citigroup Inc. (NYSE: C) announced a reverse stock split plan of its common stock and its intention of reinstating dividend payment to shareholders.
According to the nature of the reverse stock split, 10 shares of issued and outstanding Citi common stock will be combined into one share of common stock without any change in the par value per share after the close of trading on May 6, 2011. Moreover, the number of outstanding shares of Citi common stock will be reduced to 2.9 billion from approximately 29 billion. Citi common stock will continue trading on the New York Stock Exchange (NYSE) under the symbol “C” but under a new CUSIP number.
No fractional shares will be issued in the reverse stock split. However, shareholders holding a fractional share of common stock will be paid cash.
Further, Citi plans to restore a quarterly dividend of 1 cent per common share in the second quarter of 2011, following the reverse stock split.
Previously, Citi’s quarterly dividend spiked to 54 cents per share in 2007, prior to the financial crisis. With a financial crisis starting to effect major banks in late 2007, Citi cut its dividend to 32 cents per share for the first three quarters of 2008. In October 2008, the dividend was reduced to 16 cents. Further, in January 2009, it was decreased to one cent. Since April 2009, Citi stopped the payment of dividends.
Currently, the actions taken by Citi followed Fed’s approval of dividend increase and stock buyback after the completion of stress tests over banks’ financial position, which would definitely boost investors’ confidence in the U.S. Banks.
Citi was one of the 19 banks that were subjected to “stress tests” conducted by the Federal Reserve. Due to the recession, Fed had put restrictions on increasing banks’ dividends and share buybacks in exchange of the bailout money. Following the repayment of the bailout money, many banks started exerting pressure on the regulators to let them restore their dividends.
This long expected decision was a major milestone for the banking sector, signaling that the notified banks have fully come out of the effects of the financial crisis. This paved the way for these banks to reinstate dividends and buy back shares.
These banks, including big names such as JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corporation (NYSE: BAC) and Wells Fargo & Company (NYSE: WFC), needed to show that they had adequate capital to address potential losses over the next two years under various scenarios.
This marks the strength in Citi’s business model, reflecting the company’s commitment to return value to shareholders coupled with its strong cash generation capabilities. Citi has been affected drastically by the subprime mortgage crisis. To avoid bankruptcy, the company took several steps over the past two years. We believe that through the reverse stock split, investors’ sentiments will be positive in the near term. Investors would be attracted toward investing in higher-priced stocks.
Citi is strategizing its plans and is focusing on its core businesses to support economic growth. However, growth depends entirely on banking, which provides loans to small businesses and providing capital.
At the end of 2010, the U.S Treasury sold its remaining shares of common stock, earning $12 billion in profit for taxpayers on the investment in Citi. Since 2006, full-year 2010 was a complete profitable year for Citi with all four quarters reporting cumulative positive net income of $10.6 billion.
Though restructuring initiatives are encouraging, the revenue headwind remains a concern. The shrinking of its business through assets sale, the CARD Act and the financial reform law continue to challenge revenue. We believe that solid earnings at Citi would remain elusive until its revenue experiences decent growth. On the flip side, reverse splits are not always successful as shares of American International Group Inc. (NYSE: AIG) fell in 2009 after the company cut its share count in a 1-for-20 reverse split.
Citi currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Further, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.
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