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Citigroup’s Dividend Reinstatement & Reverse Stock Split

Mark — Sun, 24 Apr 2011 05:29:38 +0000

Citigroup (C) will be splitting its stock soon. CEO Vikram Pandit is tired of seeing his company’s shares languish below the $5 level. Pandit has announced plans to authorize a reverse split of the company’s stock. Every 10 shares of Citigroup will be worth 1 share once the split is finalized. Based on this past week’s closing price, shares would be valued around $45 a share. So, why is Citigroup doing a reverse split?

Citigroup Reverse Stock Split

Citigroup is trying to make its stock more attractive to mutual fund companies and other institutional investors. Most fund companies and pension funds avoid investing in companies whose shares are priced below $5 because these penny stocks are often viewed as too volatile. The company is also trying to stop speculators and sellers from shorting the stock. They believe that these groups are holding down its shares.

I think that a reverse split is a bad move for Citigroup. If the market sentiment is bearish on a stock then short sellers will drive the stock down at $40 a share just as they did at $4 a share. This seems like an unnecessary move. The company was just starting to get things back on the right track by selling off unprofitable assets and restoring its dividend.

Former Dividend Stocks Favorite

Citigroup had just reinstated its dividend again and is starting payments at 4 cents annually. It is a low payout but it is a start in the right direction. If the bank’s capital levels were deemed inadequate, the regulatory agencies would not have approved any payout whatsoever. Citigroup plans to increase its payout throughout next year. Hopefully, the company can rejoin the ranks of quality dividend stocks in the future.

I like Citigroup’s stock but I do not expect the reverse stock split to have a major impact on its shares. AIG had a reverse stock split a year ago and it has done nothing to reduce its volatility. The key to growth in the share price will be earnings improvement and the return of capital back to shareholders via buybacks and distributions.

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Time To Buy Citigroup

Mark — Tue, 26 Oct 2010 00:37:04 +0000

The banking giant is finally starting to become a favorite of analyst everywhere. Rochdale Securities analyst Dick Bove has been bullish on the bank for some time now. Goldman Sachs added Citigroup (C) to its conviction buy list today. Shares of Citigroup responded by rising 2.4% today to close at $4.21 per share.

I have not been a fan of Citigroup in the past but things are looking better at Citigroup. The firm has been doing a nice job reducing its size by selling off riskier assets. The bank has a lot less exposure to the residential real estate market than its banking peers. Bank of America and JPMorgan’s loan portfolios dwarf those of Citigroup. According to the Wall Street Journal, Citigroup has only $95 billion dollars in mortgage loan exposure through its consumer banking and its securities banking business.

Goldman also credited Citigroup’s efficient loan review process with helping the banking giant avoid a lot of exposure to the toxic mortgage market. Goldman has a price target of $5.50 per share meaning that the investment bank still see 30% more upside in the shares. I agree with the Goldman’s call and have been bullish on shares of Citigroup since April of this year.

Disclosure: I do not own shares of Citigroup.

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3 Stocks For Long Term Investors

Mark — Tue, 27 Apr 2010 05:33:52 +0000

1. AK Steel (AKS) has dropped quite a bit over the last few weeks. The steelmaker has shed almost 25% of its value since April 6th. Shares have dropped due to increasing iron ore prices and a sketchy forecast for the next two quarters. It may take a few quarters for shares to rebound but the current price for AK Steel has gotten my attention. Shares were last trading at $18.91 in the after hours market. Iron ore may cut into the firm’s short term profits but sales are still strong as noted by the Q1 earnings. The lowest analyst estimate for AK Steel’s 2011 earnings is $1.30 which would mean that shares are trading at 14.6 times earnings even with the most pessimistic forecast.

2. Goldman Sachs (GS) is in the midst of a media nightmare. The investment banking firm is facing potential lawsuits and tighter regulatory scrutiny. Investing in Goldman is a long term endeavor. It may take a year or a year and a half but Goldman will survive the media storm and find a new way to boost earnings. Goldman is always ahead of the curve and there is no doubt that the firm’s trading desk will find new ways to make money. If investors get a chance to buy shares anywhere near the $115 warrant price that Buffett owns, then they should buy shares.

3. Citigroup (C) is finally looking like a good buy. Wait for the government to unload its shares onto the market. As the government unloads stock, shares of Citigroup should decline giving investors an opportunity to buy. The government is preparing to unload its 27% stake in Citigroup beginning with the sale of $7.7 billion shares in Citigroup stock soon. The government will make a profit as long as shares are sold above $3.25. Investors should be able to buy the stock in the mid to high $3 range.

Disclosure: I own shares of Goldman Sachs. I previously owned AK Steel but sold off my position at $25.

Photo by: TreyDanger

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Earnings Seasons for Financials

Mark — Fri, 17 Jul 2009 16:22:35 +0000

Here’s my take on each of the financial companies earnings:

Goldman Sachs

It was a great quarter for Goldman Sachs. The investment bank had huge gains from its trading operations and bond offering business. I know that everyone is saying buy Goldman right here and now but I wouldn’t buy the stock at its current levels. The stock is trading at $150 and I would like to know more about the investment bank’s business model will be going forward. Goldman appears to be taking great risks again. Will Goldman’s trading operations be as profitable quarter after quarter?

JPMorgan Chase

JPMorgan Chase had a mixed earnings season. The banking giant saw its margins, trading and deposits go down. JPMorgan increased its loan loss reserves for the quarter as its loan portfolio saw increasing delinquencies. JP Morgan did have strong results from its commercial banking and asset management businesses. Analyst Dick Bove says “The reality is that this was a very bad quarter for JPMorgan Chase.” “Capital gains are the reason for the strong revenue and earnings performance and these are not sustainable.”

Bank of America

B of A is my favorite bank because of the upside potential but it is also the bank with the greatest downside risk. Bank of America’s earnings were boosted by its sale of China Construction Bank Corp and its strong deposit base. But the nation’s largest bank is still facing rising charge offs from its commercial, residential and credit card loans. CEO Ken Lewis stated that ”Profitability in the second half of the year will be much tougher than the first half.” He attributed much of the bank’s success to capital gains.

Citigroup

I think that Citigroup still faces the same problems that have plagued the company for years. Citi does not have core businesses that make money. If you factor out the sale of Smith Barney to Morgan Stanley, Citi would have lost 2.4 billion in the second quarter. While JPMorgan Chase, Goldman Sachs and Bank of America were all able to generate substantial gains from trading operations, Citi was unable to do the same. The promising news for Citi is that CEO Vikram Pandit stated that troubled asset write downs “may be largely behind us.” This may be true but I still wouldn’t buy Citi even at $2 per share.

Short Term Outlook for 2009

The banking giants were able to post decent results for the second quarter but many of these gains were attributable to capital gains. It is unlikely that these one time gains will be duplicated in coming quarters. Loan losses will continue to grow as unemployment and income levels continue to drop.

Long Term Outlook

When unemployment moderates and the economy rebounds, the earnings power of these mega banks will be realized.

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Bank of America Needs More Capital

Mark — Mon, 27 Apr 2009 05:18:46 +0000

I have read a few articles late tonight that state that government stress tests show that Bank of America and Citigroup will need to raise billions more in capital. These 2 banks have already received almost 100 billion in funds through the government’s TARP program. These findings illustrate a larger problem facing US banks. IF B of A and Citi need more funds then why doesn’t PNC, Wells Fargo, US Bancorp or Suntrust need more capital? The problem in the banking system is that there is a perpetual cycle. Increases in unemployment lead to greater mortgage delinquencies which result in a decrease in housing prices. This leads to larger asset write downs which require banks to raise more capital. Until unemployment stops rising it will be impossible to predict how much capital banks need to survive this economic downturn. It is clear now that in September of 2008 that the US banking system was insolvent and without the major capital injections from the Treasury; the system would have collapsed.

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Bank Stocks May Finally Be A Bargain

Mark — Mon, 23 Mar 2009 04:50:50 +0000

The US Treasury is finally set to unveil its plan to buy toxic assets from banks. The public private partnership is expected to buy up to 1 trillion dollars in bank assets. The government hopes to entice private investors with guarantees and offering low interest loans to remove toxic assets from bank balance sheets. The government will share the risk if the toxic assets continue to decline in value. If these assets are removed from bank balance sheets without additional government ownership then the major banks should see their share prices increase substantially.

The Public-Private Investment Program should benefit Bank of America, Citigroup, JPMorgan Chase and Wells Fargo the most. These are 4 of the largest banks in the country and have balance sheets riddled with toxic assets. The 1 trillion dollar plan should help alleviate some of the problems facing these banking giants. All of the assets that are currently deemed as bad assets are not such and will have some value in the future. If the government holds these assets until the economy improves then the stock prices of the major banks should rise over a time. It may take a few years to see a significant rebound in price but with a plan finally in place the financial sector should improve. I have been a buyer of Wells Fargo, Bank of America and JPMorgan Chase at these distressed prices.

I don’t know if 1 trillion is enough to remove all of the bad assets from the balance sheets of banks but it is a good start.

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Bleak News

Mark — Mon, 02 Mar 2009 18:52:42 +0000

AIG announced the biggest quarterly loss in the history of the US. AIG lost nearly 62 billion last quarter.

Citigroup looks like it is going to break below $1 per share. It’s time for Citigroup to be nationalized. it’s not Pandit’s fault but I don’t see how he can keep his job with the stock in free fall. Can Citi lure any other highly successful competent executive to take this job right now?

General Electric shares dropped below $8 for the first time since 1993.

Dow Chemical dropped to $7 and Dow is trying to sell off its agribusiness to stay afloat. Dow may be the first company to go belly up after completing a merger. The Rohm & Haas purchase is forcing Dow to sell its most valuable assets just to complete the deal.

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Citigroup

Mark — Fri, 27 Feb 2009 20:16:06 +0000

Citigroup is down to $1.50 a share amid an agreement with the Federal government to convert 25 billion in preferred stock to common stock. Citi also announced that they will not be paying a dividend. There is no reason whatsoever to own Citigroup stock. The stock is worthless. if you want to see Dow’s future, look at AIG.

Dow Chemical (DOW) sank below $7.20 today. Every day it seems like Dow Chemical sets a new low. Dow needs to eliminate its dividend altogether to save capital.

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Ken Lewis is a Goner

Mark — Fri, 20 Feb 2009 19:18:12 +0000

Bank of America (BAC) dropped to the $2.50 level today and has a market cap below 15 billion. There is much speculation that the bank will be taken over by the government and nationalized. If Bank of America is nationalized stockholders and debt holders would essentially be wiped out. This weekend will be very telling for Bank of America. I would expect that that government would be in talks with Bank of America about a possible nationalization plan. Even if Bank of America is able to remain private Ken Lewis is a goner. He won’t be able to survive this. There will be various lawsuits from shareholders and debt holders and it’s unlikely that investors have any confidence in his leadership after the Merrill Lynch acquisition. He could have survived the Countrywide purchase but the Merrill Lynch acquisition has likely done him in. He knew about the toxic assets at Merrill and still went ahead with the deal. He may be held liable for not disclosing this information to shareholders. There are also reports that Lewis is losing the confidence of senior management.

Citigroup (C) is in an even worse situation. Citigroup has declined to $1.61 and its market cap is now below 10 billion. This is unbelievable. Citi does not have the deposit base of Bank of America and is trying to sell of assets in a depressed economy. I don’t see anyway that Citigroup can stay a private firm. If Citi breaks the $1 level the former banking giant will have to be nationalized. Pandit may need to go as well. Although he didn’t create all of the Citi’s problems, Pandit may have to go to boost investor confidence in the stock.

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Banks Halting Foreclosures

Mark — Fri, 13 Feb 2009 18:57:39 +0000

It appears that something good will come out of the Congressional hearing that the House of Representatives held with bank executives. JP Morgan Chase is joining Citigroup as one of the few ”superbanks” that are halting foreclosures temporarily. JPMorgan will be suspending foreclosures until March 6th and Citigroup will halt foreclosures until March 12th. This plan has been announced after bank CEO’s received a grilling from Congress over their use of TARP funds, excessive compensation practices and unfriendly business practices. They were strongly urged by Congress to halt foreclosure proceedings until after the Treasury announces its new plan to help homeowners.

The Federal government is working on a 50 billion dollar plan that would help to stem the tide of rising foreclosures and hopefully bring a bottom to plummeting real estate prices. The government is considering using subsidies to help homeowners make mortgage payments. I think that this is a start but it will take much more than 50 billion to solve this crisis. Ultimately the government will need to get the banks and investors to cut the principal on some of these loans. Loan modifications are the only way that I see to solving the foreclosure crisis. CDO’s and mortgage backed securities have complicated things because you may have a bunch of different investors that have a stake in the same properties.

If a family is living in a house that has a $500,000 mortgage and the house is only worth $350,000; there is no motivation for the family to continue to pay the mortgage. Often the family will just walk away leaving the bank with another home to auction off. The government needs to let banks know that it is better to get something than nothing. Earning $350,000 from the house is better than to auction it off and get much less. Government subsidies will help and should be a part of the plan but a reduction in principal will help even more. A temporary cap on adjustable rate mortgage interest rates and new home buying incentives will help us to start to clean up this mess.

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