With the U.S. selling its remaining 2.4 billion shares for $10.5 billion, shares of Citigroup look especially enticing.
THE U.S. TREASURY DEPARTMENT on Monday announced it would sell its remaining shares of Citigroup common stock, a milestone for the bank and the government.
The Citi bailout was the government's largest investment during the financial crisis, and the Treasury walked away with a profit. Obviously, Citigroup (ticker: C) is also much better off than when the government first got involved. But given that its stock has already risen 38% year-to- date, is there much upside ahead?
We think there is. Citi is well capitalized, has a powerful international presence, and should see more growth in its stock price as its earnings return to a more normalized level. We made many of the same points in October when shares were trading at $4.11 (see Barron's Take, "Citigroup Sitting Pretty," Oct. 18, 2010).
In a filing on Tuesday, the Treasury said that it was selling its remaining 2.4 billion shares for $10.5 billion, or $4.35 each, a 10-cent discount to Monday's closing price. All in all, the government realized a 27% gain on its $45 billion investment in the shares, selling at an average price of $4.14 after buying at $3.25. The government continues to own warrants and $3 billion worth of preferred shares.
The Treasury's exit "removes one of the primary hurdles to increased institutional ownership, which should be a significant longer-term positive," wrote Jeff Harte, an analyst at Sandler O'Neill & Partners. As of the end of the third quarter, institutions owned about 48.4% of Citi's shares; if institutions bought all of the government's shares that would increase to 56.5%, Harte wrote. Large-cap banks and brokers overall average 73.9% institutional ownership.
Citi still needs to sell some of its noncore holdings, many of which the bank picked up during an acquisition spree before the bailout.
Standard & Poor's equity analyst Erik Oja expects Citi to start reporting normalized earnings next year as it continues to sell off assets and grow its core business. Analysts expect Citi to post 46 cents of earnings in 2011, giving the company a price-to-earnings multiple of 10 times. Citi's peers trade at about 13.3 times 2011 earnings, Oja notes. The stock is also trading just above tangible book value of $4.44, as of Oct. 18.
Much of Citi's growth should come from overseas, because of the bank's strong position in emerging markets and the negative impact of U.S. financial regulatory reform, Oja says. Citi's emerging-market consumer business is growing fast – loans are up 11% this year. And the company's balance sheet is in good shape. Its Tier 1 common ratio is 10.3%, and it sports a nonperforming asset coverage ratio of two times, notes Goldman Sachs analyst Richard Ramsden.
The government's exit should free up the bank to use its capital in new ways, and possibly try to return some to shareholders. After issuing tens of billions of shares in the past three years, the company might start paring its share count in the next year.
"I think eventually – probably within a year – they have to start thinking about some sort of stock-buyback program," Oja says.
And Citi could begin paying a dividend again, although it obviously won't come close to the 54 cents a share it paid out in 2007, Oja says. Citi still has a ways to go before the lingering effects of the crash and bailout are behind it; but today's news removes a significant overhang, and shareholders should soon see more benefits.