Last month, Citigroup announced plans for a 
10 for 1 reverse stock split, which will move the share price somewhere near $40 by reducing the number of outstanding shares from the current 29 billion to a much more reasonable number of 2.9 billion. Citigroup share price is down 92% from its 2006 high of $55.70 which was achieved with close to 5 billion shares outstanding. The reverse split will take effect May 6, Citigroup CEO Vikram Pandit believes that the reverse split, together with with the reinstatement of a penny per share dividend as an initial step are important first moves as the company anticipates returning capital to shareholders starting next year. Citigroup has paid back the $45 billion it received from the government in 2008; it cannot pay quarterly dividends of more than 1 cent a share until 2012 as a condition of the rescue. Citigroups dividends to shareholders had been as high as .49 cents prior to the 2008 economic meltdown, and in 2008 the dividend was .16 cents before the collapse. The last dividend the company paid was .01 cent in February of 2009.
Citigroup (NYSE:C) has been in the midst of righting itself since its collapse. TARP money and government favors permitted it to survive. However, CEO Vikram Pandit has steadily marched the company back from the dead over the course of the past 2 years. While not all of his decisions have been well received the results so far have been better than anticipated. The company has focused much of its energy in the past two years on cutting off parts of its businesses that don’t fit with its main banking operation.
Unfortunately there are also recent reports that Citigroup continues to struggle with its mortgage business; the bank is still selling mortgages that violate quality standards, according to an internal Freddie Mac (OTCBB:FMCC) review obtained by Bloomberg in January. Fifteen percent of the loans Citigroup sold to the government owned mortgage finance company in the second half of 2009 and the first half of 2010 had such flaws as missing appraisals, insurance documents or income miscalculations, according to a review of 375 mortgages. The target for defects should be about 5 percent, said Tim Rood, a former executive with Freddie’s sister agency Fannie Mae, and now managing director at Washington-based advisory firm Collingwood Group LLC. Citigroup faces $100 million in payouts on the loans if customers demand refunds for mortgages that stop paying, according to Paul J. Miller of FBR Capital Markets in Arlington, Virginia. Miller based his estimate on the numbers in the Freddie Mac memo.
Also of note, Citigroup Inc. will raise as much as $273 million selling a stake in insurer Primerica Inc (NYSE:PRI). Citigroup is offering 12 million shares at $22.75 each. Underwriters have the option of purchasing an additional 1.8 million Primerica shares from Citigroup. The bank will still hold 20.7 to 23.1 percent of Primerica after the sale. Citigroup was the largest shareholder as of December 2010 with a 40 percent stake, according to data compiled by Bloomberg. Primerica was part of Citi Holdings, the portfolio of businesses Pandit said he would sell, wind down or restructure in order to get back to a more core business model. Primerica, based in Duluth, Georgia, sells term life insurance and mutual funds. It sold 21.36 million shares at $15 each as part of its initial public offering in March 2010. Primerica has declined 3.4 percent this year overall.
Disclosure: No position in C or PRI
This is not an unexpected situation for informed investors; as the government owns more than one quarter of Citigroup, and has been unloading roughly 20% of their stake of approximately 7.7 billion shares in the company since late April. The Treasury began selling its common shares under a prearranged plan with Morgan Stanley as the sales agent for the deal. The initial sell off of shares amounts to roughly 1.5 billion shares. Citigroup stock should basically trade sideways to slightly lower while unwinding of this first lot is completed. Once complete, the stock should move up as the company continues to unwind or sell off many of its toxic assets; on the path back to its core banking business as the fundamentals continue to improve. It is important to remember that at some point the Fed will have to raise interest rates and banks like Citigroup will once again have to actually work at turning a profit, but over the long haul, this stock should bring solid gains to its holders. 
