Befitting a company that has pledged to provide greater transparency, Citigroup Inc. on Monday announced a capital deployment plan that the markets could see right through.
That token dividend and some share price artifice may be just the thing Citi needs to maintain momentum, however.
By scheduling a penny-a-share payout for the second quarter, Citi puts to rest any speculation that the Federal Reserve was uncomfortable with the company's financial condition or capital planning efforts. And by planning a 1-for-10 reverse stock split, which will predate the dividend payout, Citi puts itself back on the radar screens of institutional funds that are barred from holding stocks that trade below $5, while giving employees the morale booster of working for a company with a share price in the mid-$40 range instead of the mid-$4 range.
The value of these psychological benefits cannot be understated, especially for a company like Citi, which learned early on in the financial crisis about the power of public perception and the repercussions of reputational risk. And at this point in Citi's turnaround, with most of the low-hanging fruit already picked, any bit of good news for shareholders can buy patience as the company tries to finish draining a large pool of unwanted assets.
The reinstatement of the dividend was a surprise given that Citi executives had been saying for weeks that they did not expect the company to start returning capital to shareholders until 2012. On the surface, the speeding-up of the timetable was Citi's boldest move yet to show it believes it has turned the corner and is, as Chief Executive Vikram Pandit said in Monday's press release, "a fundamentally different company than it was three years ago."
But underlying the announcement was an even more compelling reason to act. With rival firms scrambling since Friday to announce dividend payouts and stock repurchase authorizations upon the completion of the latest round of stress tests by the Fed, Citi risked having its intended message of prudence contorted into a signal that something in the company's regulatory profile was amiss.
Next to JPMorgan Chase & Co.'s plans for a 25-cent quarterly dividend, Citi's 1-cent planned payout looks especially nominal. But the announcement should be just a precursor of dividend increases to come, analysts said.
"We see the restoration of a dividend as an indicator of improved capital levels, and expect it will be followed in 2012 by a higher dividend once the Fed, the U.S. Treasury, and the [Federal Deposit Insurance Corp.] approve," Standard & Poor's equity analyst Erik Oja wrote in a note to clients. He maintained his "buy" recommendation on the stock and his price target of $6.
But that price target soon may get revised to $60. The reverse stock split, scheduled to occur after the close of trading on May 6, will have the effect of multiplying the closing share price that day by 10, and reducing the number of shares of Citi common stock outstanding from 29 billion to 2.9 billion. Based on Monday's closing price of $4.43, Citi's share price would jump to $44.30. The last time Citi traded above $40 was in late 2007, as the early stages of the financial crisis were beginning to unfold. Back then, the company was paying a dividend of 54 cents a share.
By July 2008, the dividend had dropped to 32 cents a share. The next quarter, it was halved to 16 cents. And in early 2009, Citi suspended dividends altogether, as it announced a plan to have investors swap preferred shares for common stock in an effort to raise tangible common equity. When the exchanges were complete that summer, the number of Citi common shares outstanding ballooned to more than 20 billion.
With so many shares available, Citi stock accounts for about 6% of average daily volume on the cash equity exchanges, according to Roger Freeman, a Barclays Capital analyst who follows brokers and exchanges.
"We believe the reverse stock split will have a notable impact on overall industry volumes," Freeman wrote in a note to clients, in which he predicted that Citi's action would result in a 5% to 6% decline in average daily volume for the cash equity exchanges. But given the relatively small portion of revenues that the major exchanges generate from cash equity trading — under 10% for both NYSE Euronext and Nasdaq Omx Group — and the offsetting impact of other industry trends, he declined to change his earnings estimates just yet for the publicly traded exchange companies.
Citi's shares will begin trading on a split-adjusted basis on the New York Stock Exchange beginning May 9. Every 10 shares of issued common stock will be combined into one share, without a change in par value.
A 1-for-10 reverse stock split is not without precedent in the banking industry. E-Trade Financial Corp. conducted a 1-for-10 reverse stock split in June of last year.
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