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Citigroup: Bulls In Charge, But Obstacles Still Exist

Jul. 06, 2017 4:08 AM ETCitigroup Inc. (C)BAC, JPM8 Comments
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  • Recent company headlines have stoked optimism and brought renewed attention to Citigroup.
  • Better dividends and substantial stock buybacks will continue to support the long-term outlook.
  • Investors must remain aware of certain macro factors that could change the outlook and derail the current rally before the end of this year.

Some of the biggest financial media headlines of the last several weeks have been generated by Citigroup Inc. (NYSE:NYSE:C), which recently surprised markets when the company boosted dividends and stock buybacks in ways that surprised most of the analyst community. The market response has been strong, with the stock moving to long-term highs near $70 per share. But while this is clearly good news for the stock, there are still potential obstacles that could stall gains in the second half of this year. Here, we will look at some of the factors that could reverse portions of the current optimism levels if certain scenarios ultimately come to fruition at the macro level.

Now that Citigroup has passed its recent stress tests, the bank is in a position to return roughly $19 billion in capital to shareholders. Share buybacks will account for 83% of this figure, so it is clear that Citigroup significantly favors buybacks over dividends. The sheer size of these numbers does go far to explain the major rallies that can be viewed in the context of the five-year chart shown above. But there is still potential for all of this enthusiasm to start to unravel if we see revised interest rate expectations at the Federal Reserve.

One of the most worrisome issues with all of the recent news is the fact that Citigroup is now scheduled to pay out much more than the bank is expected to earn over the next year. The revenue outlook could further deteriorate if voting members at the Fed start to backtrack and suggest that previous concerns over possible consumer inflation trends are no longer valid. The combined effect here could be a stock selloff (or at least a round of profit-taking) if investors lack the confidence to suggest markets will see a real

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