Nothing surprising in today’s announcement from Citigroup (C). After all one reason I added the stock to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ on April 17 was the expectation that the company would announce a significant share buyback program relatively soon.
Today the company’s board of directors voted to continue, as expected, the company’s token 1 cent a share quarterly dividend (payable to shareholders of record as of May 6) and approved the purchase of $1.2 billion in stock through the first quarter of 2014.
The stock repurchase became possible after Citigroup passed the Federal Reserve’s last Comprehensive Capital Analysis and Review (CCAR.) The size of the purchase is roughly enough to offset the dilution created by the company’s annual stock grants so it’s not a major support for the share price. Instead it’s significant as a milestone on the bank’s post-financial crisis journey back to the status of an average bank.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in Citigroup as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
Citigroup (C) is nowhere as good a bank as the one I just sold—Australia’s Westpac Banking (WBK)—out of Jubak’s Picks http://jubakpicks.com/the-jubak-picks/ , but Citigroup does have one major advantage: it is still in the relatively early stages of digging itself out of the mess the global financial crisis left behind. And that means it has considerable upside if all it does is perform like an average bank.
So, for example, in the first quarter, reported by the bank on April 15, Citigroup reported that the net loss at its “bad bank,” Citi Holdings, fell by 20% year over year to $795 million. And, finally, Citigroup decided that the market for the $86 billion in North American mortgages held by the bad bank had improved enough that it could release some of the reserves–$375 million—that it had set aside against losses on these mortgages. Read more
I’m going to take advantage of today’s bounce (or whatever) to recommend selling shares of Westpac Banking (WBK in New York or WBC.AU in Sydney.) More specifically, I’m going to recommend selling the shares of this Australian bank out of capital gains oriented portfolios such as my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ . I’d keep the shares, however, in income oriented portfolios such as my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ for a while longer on the 5.31% yield
I think the yield is attractive and safe. I just don’t see much upside for the share price. Especially with the market seeing the rebirth of fears about slowing economic growth in China. When China catches a cold these days, Australia sneezes.
The problem, basically, is that Westpac Banking has run so far ahead of its banking peers that the shares are susceptible to stagnating or even retreating here. Read more
It’s more accurate to think of Mitsubishi UFJ Financial Group (MTU in New York) as a securities portfolio rather than as a bank right now. And from that perspective, Mitsubishi UFJ is likely to be one of the biggest beneficiaries of the downward trend in the yen that I expect to resume as soon as the financial markets move past the chaos that is Cyprus.
For an indication of what the weak yen does to the income statement at Japan’s biggest bank just take a look at the February 1 report of third quarter earnings. Third quarter profit doubled as the rally in the Tokyo stock market based on a falling yen led to higher fee income and smaller stock portfolio losses. That doubling in earnings came even though as a bank Mitsubishi’s business continued to lag. Income from lending—a core bank business, no?—fell by 7.8%, for example. Making up for that weakness was a big reduction in impairment charges on the bank’s equity portfolio—Japanese banks typically take big equity positions in the companies they lend to—and an increase in earnings from the bank’s brokerage unit.
Impairment charges from the bank’s shareholdings dropped to 90.9 billion yen in the nine months that ended on December 3. That was a 41% drop from the same period a year earlier and was down from 174 billion yen in the first six months of 2012.
Earnings at the company’s brokerage business, Mitsubishi UFJ Securities Holdings, rebounded to a 10 billion yen profit from a loss of 12 billion yen in the year-earlier quarter.
With the Bank of Japan signaling that it will announce aggressive moves to weaken the yen at its April 3 to 4 meeting, I think we’re likely to see a resumption of the rally in Japanese stocks that has stalled as turmoil in the EuroZone has led to a flight to safety in the yen that stopped the decline of that currency.
Japan’s big banks give you broad-based exposure to any upward move in Japanese equities. Any of Japan’s Big 3 banks can do the job in your portfolio. I prefer Mitsubishi UFJ because the ADRs trade with a 1.2 million unit average daily volume in New York. That gives them better liquidity—easier entrances and exists—than ADRs of Sumitomo Mitsui (SMFG in New York with 670,000 unit volume) or Mizuhi (MFG in New York with 530,000 unit volume.)
I’m not looking to hold Mitsubishi UFJ for any longer than the yen decline continues. I’m adding the ADRs to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ today with an initial target price of $7.10, about 22% above the $5.92 New York close today, March 26, on the ADRs. I’d re-evaluate policy at the Bank of Japan if the ADRs get to that level—or if it looks like the yen’s downward trend has stalled to see how much life there is left in a falling yen.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
The market’s first take on the Federal Reserve’s stress test of U.S. banks has been to divide bank stocks into “naughty” and “nice.”
But I’d like to dive a little deeper and look at how banks that have been told by the Fed that they can pay out more on dividends or increase their programs of share buybacks have chosen the divide those payout streams. That’s because I think investors get a lot more reward from a dividend increase than they do from a buyback. It makes sense, to my way of thinking, to go with the banks that emphasize dividends over buybacks—all else being equal, of course.
In the market’s first cut on the Fed list banks such as Bank of America (BAC) that have received the Fed’s stamp of approval on their capital plan for stock buybacks and/or dividend increases have seen their share price move up today. Bank of America shares, for example, closed up 3.8%.
Banks that got a thumbs down from the Fed and will have to resubmit their plans closed down today. BB&T (BBT), for example, finished off 2.36%. (It’s hard to say that JPMorgan Chase (JPM) was down today because the Fed told the bank to improve its capital plan. The bank and CEO Jamie Dimon took heavy fire yesterday from a Senate report that ripped the bank’s culture and risk controls in the London Whale trading debacle. JPMorgan Chase shares closed down 1.92% today.)
But the banks that got approval to increase their buybacks or dividends have put together very different mixes.
Some banks chose to increase their share buyback programs but not to increase their dividends. Citibank (C), for example, announced a new $1.2 billion program of share purchases but kept its dividend at a penny a share. That’s not exactly a rousing vote of confidence by the bank’s management in the bank’s cash flow going forward. It’s hard—and very visible—to cut a dividend once announced. It’s much easier to announce a big buyback program and then to execute only a part of it if times turn tough. Bank of America was another bank announcing a big buyback–$5 billion—without a dividend increase.
Most of the banks that got the Fed’s approval chose a mix of dividends and buybacks. Banks that wanted to send a message of confidence to shareholders seem to have picked an increase in the neighborhood to 20%. Wells Fargo (WFC) raised its dividend by 20%. US Bancorp upped its dividend by 18%. Both banks also announced buybacks. (US Bancorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/)
A very few banks went for all dividends. Capital One (COF) is the standout here. The bank announced a 500% increase to 30 cents from 5 cents.
The financial sector has been a clear leader in the rally to all time highs in the U.S. stock market. Right now I’d be looking at bank stocks where management is demonstrating a commitment to taking care of shareholders with higher dividend payouts.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any company mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/