Friday, January 4, 2008

Citigroup: Bove is Right

Since the turn of the century Citigroup has traded between 2.2 and 5.4 times its book value, usually around 3 times. It current price to book value? 1.16.

The market is essentially saying its expects Citi's situation to deteriorate to the point its book value is decreased 60% from its current levels. That would bring the stock current price to book level inline with historic norms. Let's talk dollars. Citi's current book comes to about $172 billion or $24.36 a share. At 3 times that, the historical trading level, the stock would be trading at $73.08 a share. At 2 times book which is below the lowest level the stock has traded this century, the stock must rise to $48.72 or 69% higher than current levels.

At current prices, in order for Citi's price to book to be in line with historical averages, Citi must shed $103 billion in book value. Am I the only one who cannot fathom that happening?

What does this mean? Citi's book value will decrease after the next round of write-down's is announced in January when earnings are released. That reduction will be a drop in the bucket of Citi's actual worth. It also means that there is now a ton of upside in shares as they eventually drift back to normalized price to book values.

Punk Ziegel analyst Dick Bove said Wednesday he does not believe Citigroup needs to cut its dividend to retain cash and improve capital ratios. Instead he recommends the banks reduce assets to bolster capital ratios if necessary. "Citigroup will absorb its current earnings setbacks and then reconcentrate on its enormous earnings power," Bove said. He went on the say on CNBC that Citi trading at these levels "was ridiculous".

What else could Citi easily do? How about a stock dividend? I am enrolled in the DRIP program at Citi anyway so I get my dividends from them in shares anyway. Citi could easily take quarters 1 & 2, convert the cash dividend to a stock one and save itself $5 billion that would then pay for the second half of the years dividend. It would be a great way to keep shareholders happy and preserve capital while the credit market get sorted out.

Disclosure: Long Citi

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