Citi Preferred Stock Conversion: A Win-Win For Preferred Stock Investors

During July of this year Citigroup performed one of the largest preferred stock conversions in history.

The conversion was voluntary so many holders of Citi trust preferred stocks struggled with the decision.

Holding onto their shares meant the continuation of the known, fixed quarterly dividends. But if too many of their fellow shareholders converted their shares, those who did not convert could find themselves in an "illiquid" market where there are not enough buyers and sellers left to do trades.

Unless Citi called the shares some day, an illiquid market could mean that those chosing to hold onto their Citi trust preferred stock shares, while continuing to receive quarterly dividends, would never be able to sell their shares and get their principal back.

Now that the big conversion is over, there is good news for both those who chose to hold onto their Citi trust preferred stock shares and for those who chose to convert.

The much-feared illiquid market never materialized. While enough preferred stock shares were converted for Citi to meet their financial goals, plenty of shareholders decided to continue to hold their shares. The daily trading volume of Citi trust preferred stock shares over the last few weeks has been roughly the same as it has historically been.

And for those who converted, you are in the chips as well.

Scroll down and take a look at my July 21, 2009 post on this blog titled "Know Your Citi Conversion Break-Even Point." In that post I provided a table that shows Citi preferred stock holders the market price that Citi's common stock has to get to before converting their shares becomes profitable.

Looking at the table, those who paid top dollar some time ago for their Citi preferred stock shares ($25 per share) would turn a profit by converting their preferred stock shares to Citi common stock if Citi's common stock price ever exeeded $3.42 per share.

$3.42 per share; that's been the magic number to watch for. After that price, pretty much every former trust preferred stock holder is in the black.

Citi's common stock cleared $3.42 on August 5, 2009 and has not looked back since (closing at $4.54 today). Those who chose to convert their Citi trust preferred stock shares, while no longer receiving the nice quarterly dividends that preferred stocks pay, have now made a spectacular captial gain on their original preferred stock investment.

For Citi trust preferred stock investors, the Citi conversion has provided a very rare example of a case where both investors who chose to convert their preferred stock shares, and those who chose not to, have been left with a positive outcome.

For those who converted: in the conversion table provided in my July 21 post, find the price that you originally paid for your preferred stock shares in the left column. The right column provides the value of the Citi common shares that you received at the time of conversion. If you click anywhere on the table a new window will open on your computer screen and show you the current market price of Citi common shares. The difference is your per-share profit.

Many Happy Returns.