Should We Take Advantage of Citigroup’s Capital Return Plan?

Citigroup enhances capital return plan

In late June, Citigroup (C) increased its dividend rate to $0.45 from $0.32 and initiated a share repurchase program worth $17.6 billion. In 2017, it returned $17.1 billion to its shareholders through dividend payments and share buybacks.

In the first half of 2018, Citigroup repurchased stocks worth ~$4.6 billion. It plans to make huge share repurchases in the coming quarters to attain its targeted buyback.

Should We Take Advantage of Citigroup’s Capital Return Plan?

Share repurchases depict a company’s sound financial position and therefore instill investor confidence in the stock. Higher rate spreads, rising loans and deposits, trading activity, and lower taxes have resulted in higher operating cash flows for Citigroup.

At current market prices, Citigroup has a dividend yield of 2.6%, which is higher than most of its competitors. Bankers (XLF) such as Bank of America (BAC), Goldman Sachs (GS), and U.S. Bancorp (USB) have dividend yields of 2%, 1.4%, and 2.3%, respectively.

Citigroup passed the stress test

The recent enhancement in Citigroup’s capital return plan came after the bank passed the Federal Reserve’s stress test. In late June, the Fed announced that Citigroup is among the 34 largest US banks that have cleared the stress test, indicating that the company had enough cash on hand to withstand an extreme recession situation. That means the Fed believes that Citigroup is properly capitalized to face a financial crisis.

The Fed first introduced the test after the financial crisis that began in 2007 and officially ended in mid-2009. The test measures the strength of banks under a hypothetical recession situation. The hypothetical criteria include an unemployment rate that would rise to 10% and property and stock prices that would plunge.

Citigroup ended the second quarter of 2018 with a Common Equity Tier 1 Capital Ratio of 12.1%, which was much higher than the Federal Reserve’s normal requirement of 4%.

By passing the test, Citigroup is now allowed to enhance its capital return policies, which is anticipated to be higher than last year. After the financial crisis, the Fed made it mandatory for banks to get its approval for dividend distribution and share buybacks. In 2017, the Fed allowed 100% payout of banks’ projected net incomes over the four quarters compared with a 65% payout allowed in 2016.