Prince's Departure, Recovery Potential, Make Citi a Long-Term Buy

Citigroup (C) Chairman and CEO Charles Prince has resigned.Shareholders had been asking for this move for more than a year, and all it took was a disastrous housing and credit situation that nearly crippled the momentum of the United States economy.

Citigroup's stock was recently beaten down heavily as the company was downgraded by analysts who were citing write-downs due to mortgage losses and fear that the company might need to cut its dividend in order to conserve its cash reserves. Citigroup had written down $6.5Billion worth of mortgage-based investment losses. That's plenty of money to just vanish, but the kicker is that it's  not gonna get better any time soon; the announcement of Prince stepping down was followed by further news of mortgage losses up to $11Billion.

The company tried to reassure investors by claiming that it has no plans to cut its dividend, but we'll have to  wait and see if that in fact turns out to be reality. Citi's stock peaked earlier this summer and has fallen over 30% from that high. In the midst of these hefty losses and write-downs, it was time for a change. The Chairman spot will be taken by Robert Rubin and the CEO title will be held in the interim by Sir Win Bischoff.

What's next for the struggling bank and its stock? Does anyone really know? A company having to make changes at the executive level is usually a company dealing with some kind of turmoil. However, a bank as big as Citigroup, with a reach across 100 countries is expected to recover in the coming years.

Holders have taken the hit now, but if the dividend stays where it is, then the powerful yield of over 5% is very attractive at these stock levels. I thought Citigroup would find its floor around the $35 level, but we'll have to see how traders react to Prince departure. Had this happened in the months before the credit crisis, the response would have been overwhelmingly positive but with the heavy losses lingering on the minds of shareholders I expect the response to be more muted.

Citigroup has a long way to go before it approaches its highs, and while there are much better banks out there with less exposure to credit problems, Citigroup is  a company that is so widely held that at levels under $40, it should be owned.

Disclosure: Author is long Citigroup.

Comments

[outback]

Boards with the stature of Citi's don't fire a CEO with no replacement in line unless their are serious UNREPORTED problems. Until we know the width and breadth of those problems, staking out a long term position is a crapshoot.

[outback]

Boards with the stature of Citi's don't fire a CEO with no replacement in line unless their are serious UNREPORTED problems. Until we know the width and breadth of those problems, staking out a long term position is a crapshoot.

[Brian Croner]

If you own anything in the US, until its demise you'll be the last one holding anything if you're holding onto shares of US banks. Might want to find something immaterial to hold onto, though. Just because US law says you're entitled to ownership of something doesn't mean you'll end up keeping it. That jack doesn't work one way, and it doesn't work the other way, either.