Following last week’s declaration of reverse stock split and dividend payment reinstatement,Citigroup Inc. (C) sold 3-year senior notes worth $750 million on Tuesday, according to Thomson Reuters.
Citigroup sold the 3-year floating rate issue worth $750 million at a coupon rate of 3-month London Interbank Offered Rate (LIBOR). The bonds will mature in April 2014, yielding 93 basis points more than USD LIBOR. The new notes has been rated ‘A3’ by Moody’s Investors Service, the ratings arm of Moody’s Corp. (MCO), ‘A+’ by Fitch and ‘A’ by Standard & Poor’s.
The proceeds from the offering may be used for general corporate purposes. Moreover, Citigroup might use the proceeds for the repayment of outstanding debt securities, if any.
On March 18, the Fed allowed America’s strongest banks that passed the second round of stress tests to operate independently, and set them free from government restrictions imposed during the height of the financial crisis in 2008.
In January, 19 banks subjected to the stress tests in 2009 had submitted their capital plans to the Fed. These banks were required to demonstrate that they have adequate capital to address potential losses over the next two years under various scenarios.
The second round of stress tests was basically a precautionary exercise amid the economic recovery. Also, as the banking industry swung back to profitability in 2010, big banks began pressing regulators to allow them to enhance shareholder value through dividends and buybacks.
Wells Fargo & Company (WFC), JPMorgan Chase & Co. (JPM) and U.S. Bancorp (USB) are among the major banks that received clearance to raise their dividends.
Though Citigroup and Bank of America Corp. (BAC), the biggest recipients of the bailout money during the height of the financial crisis, cleared off their dues, they did not announce any dividend increase immediately due to their fundamental weakness compared to its rivals.
However, last week, Citigroup stated that it will reinstate a 1 penny per share quarterly dividend. On the other hand, despite planning a slight dividend increase, BAC did not get the clearance from Fed.
This marks the strength in Citigroup’s business model, reflecting the company’s commitment to return value to shareholders coupled with its strong cash generation capabilities.
Citigroup 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.
Citigroup is strategizing its plans and is focusing on its core businesses to support economic growth. However, growth depends entirely on banking, which offers loans to small businesses and provides capital.
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 will continue to challenge revenue. We believe that solid earnings at Citigroup would remain elusive until its revenue experiences decent growth.
Citigroup currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report
US BANCORP (USB): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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