Expert: Paul Henneman - 6/4/2009

Question
Hi Paul;

I have a queation about Citibank's recent movement, please see this news
http://www.bloomberg.com/apps/news?pid=20601087&sid=aIh28zu1VFgo

Citibank is going to seek aproval for a increase in outstanding shares, what could happen to stock price if the plan is approved?

Thanks

Meng Jia

Answer
MengJia,
    Thank you for your question!
Unfortunately there is no easy answer to this question. On one side, the release of additional outstanding shares means that the existing stock price will go down, assuming that investors value the company at the same market cap level. In other words, if the company remains at the same valuation, there will be more outstanding shares, so it will be worth less.
    However, it is by no means certain that this will happen. Citigroup will have raised significant sums of money by releasing the additional shares, and can use these funds for paying back much of the funds Citigroup received from the government.
    In the article you forwarded, it appears that there are potentially a great many shares to be released, from the current level of 15 billion to 60 billion. The question becomes how investors will value this, if they feel that this is such a huge dilution of the shares, the price could drop. But, if they feel this is what Citigroup needs to do to return to growth, it could provide a bump up in stock price. Only time will tell for sure. If you feel strongly one way or the other, it is a good time to act. But it would be wise to consider any banking sector stock very volatile and risky right now, although in the long term these types of stocks will certainly pay off. By long term I mean five or more years, anything shorter than that is a risky investment in the Banking sector.

Please do not hesitate to follow up with me if I can be of any further service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc