Does The Citigroup Dividend Potential Make It A Buy?

| About: Citigroup Inc. (C)

Citigroup, Inc. (NYSE:C), which is a diversified financial services company best known for its global consumer credit and banking services, is yet to completely shed off the disrepute it garnered during the 2008 financial crisis. While the massive bailout and the share dilution that followed were justifiably condemned, the situation is no longer so. Though almost as large (in terms of assets) as in 2007, it is far better capitalized and its balance sheet looks far better than it did in 2008. As will be seen below, these two factors coupled with the growth of revenue, declining costs and good forecasts for 2014, make Citigroup a great choice for the investor interested in a long-term dividend yielding stock, despite the fact that its current yield is quite dismal.

Citigroup in 2008, and now

At the brink of the 2008 precipice, Citigroup had $2.10 trillion in assets. As the crisis hit, Citigroup had to initiate the first of its cuts in dividend, while having to borrow $14.5 billion. At that time, its Tier 1 Capital Ratio was 7%. Fast forward to 2013, and the company still owns $1.86 trillion worth of assets. However, its Capital Ratio has risen to 12.60%.

In terms of shares, the company had a little under half a billion shares outstanding in 2007, which rose to 3 billion shares due to the capital raising efforts of the company. This translates to a current claim of only 17% of the value of each dollar invested in 2007. Further, in the interests of improving its balance sheet, Citigroup paid only a penny per share dividend. Citigroup continues to pay this ridiculous rate of dividend, but this is likely to change soon.

Rising profits, falling costs

The main reason why Citigroup could soon raise its dividend rate is that its fortunes have been steadily heading north since 2010. As mentioned above, it has managed to improve its balance sheet considerably, and this should be the single biggest contributor to a dividend raise. This has been made possible by the steady rise of profits, from $3.60 in 2010 to $3.86 in 2012. Analysts expect it to earn $4.70 by the end of 2013.

On the other hand, the company has been largely successful in allowing its non-core and, in general, non-performing assets to gradually fall within its subsidiary Citi Holdings. In fact, Citi Holdings' assets declined by 59% over a span of two years, and now represent just 6% of the company's total assets. Hence, the apparent lack of change in total assets (as noted above) conceals the extent to which Citi has managed to rationalize its assets.

Dividend history and the way forward

The final reason why Citi will likely increase the dividend sooner than later is that it consistently paid above 25% of its profits to its shareholders in the years prior to the crash. Indeed, in the three years prior to the crisis, Citigroup paid as much as 40% of its profits to shareholders. Though the company had to devote almost its entire profits into shoring up its balance sheet, the current state of its finances and its optimistic growth projections should give it the confidence to return to the 20% level again.

What should the investor do ?

It is amply clear from the above analysis that Citigroup has almost completely emerged from the shadow of 2008, and its growth projections remain strong. These factors indicate that there should be a rise in dividend soon. While the company is expected to tread cautiously, it should be able to raise its dividends steadily for the next couple of years. Thus, if one is willing to bear with a negligible dividend in order to reap rich benefits later, he/she would be well advised to hold onto the company's stock if he/she already owns the company's stock, and buy into it if not.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.