Citizens Financial: Unlocking Value Through a Strategic Combination of Preferred and Common Shares

In an era where traditional fixed-income assets struggle to outpace inflation, investors are increasingly turning to alternative strategies to balance growth and yield. Among the most compelling opportunities lies in capital structure arbitrage—exploiting mispricings between a company's equity and debt instruments. For those willing to look beyond the headlines, Citizens Financial Group (CFG) offers a rare combination of undervalued common stock and deeply discounted, high-yielding preferred shares, creating a dual pathway for income and long-term capital appreciation.

The Common Stock: A Bargain in a High-Growth Sector

CFG's common stock has long been a target for value investors. As of August 2025, the stock trades at $48.28, with a price-to-earnings (P/E) ratio of 14.67—well below the S&P 500's 28.67 and the finance sector's 19.62. This discount is not a reflection of weakness but rather a mispricing in a sector poised for recovery. Analysts project 27.3% earnings growth for the year, driven by a robust net interest margin (NIM) expansion and a disciplined approach to cost management. The stock's PEG ratio of 0.54 and price-to-book (P/B) ratio of 0.90 further underscore its undervaluation.

The company's capital return strategy adds to its appeal. In Q2 2025, CFG returned $385 million to shareholders via dividends and buybacks, with a $1.5 billion repurchase authorization signaling management's confidence in its capital position. A 4.83% dividend yield, supported by a sustainable payout ratio of 60%, offers income investors a compelling alternative to Treasury bonds, which yield less than 3%. With a median analyst price target of $55—a 14% upside—CFG's common stock represents a high-conviction growth opportunity in the regional banking sector.

The Preferred Shares: A High-Yield Anchor in a Low-Rate World

While the common stock steals the spotlight, CFG's Series E preferred shares (CFG.PRE) offer a unique income play. These non-cumulative perpetual preferred shares, trading at $20.37 (an 18.52% discount to their $25 liquidation preference), yield 6.14%—a stark contrast to the 4.83% offered by the common stock. The fixed 5.00% annual dividend, paid quarterly in arrears, provides a stable cash flow stream, particularly attractive in a market where even high-quality corporate bonds yield less than 5%.

The arbitrage potential here is twofold. First, the deep discount to liquidation preference creates a capital appreciation opportunity if the company chooses to redeem the shares at $25. Second, the non-cumulative nature of the dividends introduces a risk-reward dynamic: while missed payments could erode value, CFG's strong capital position (CET1 ratio of 10.6%) and consistent dividend history since 2020 suggest a low likelihood of default. For income-focused investors, the preferred shares act as a high-yield anchor, while the common stock provides growth potential.

A Strong Balance Sheet as the Foundation

CFG's ability to sustain both its common and preferred dividends hinges on its robust capital structure. A CET1 ratio of 10.6% (adjusted CET1 of 9.1%) ensures ample room for capital returns without compromising regulatory requirements. The company's deposit base—bolstered by a 22% share of low-cost, non-interest-bearing deposits—supports a NIM of 2.95%, up 50 basis points year-over-year. This margin expansion, combined with a $30 million pipeline of capital markets fees, underscores CFG's resilience in a challenging macroeconomic environment.

Moreover, the company's strategic initiatives, such as its “Reimagining the Bank” program, are driving efficiency gains and cost reductions. These efforts, coupled with a disciplined approach to risk management, position CFG to navigate interest rate volatility and credit cycles with minimal disruption.

Strategic Allocation for Income and Growth

For investors seeking to capitalize on CFG's dual opportunities, a balanced approach is key. Allocating a portion of the portfolio to the common stock captures long-term growth potential, while the preferred shares provide a high-yield buffer. The arbitrage between the two is further enhanced by the company's strong liquidity position and redemption flexibility for Series E.

However, caution is warranted. The non-cumulative nature of the preferred dividends means that a single missed payment could trigger a sell-off in the preferred shares. Investors should monitor CFG's capital return announcements and macroeconomic indicators, particularly if the Federal Reserve signals tighter monetary policy.

Conclusion: A Dual-Path Strategy in a Low-Yield World

Citizens Financial Group exemplifies how a well-managed capital structure can create value in a low-yield environment. Its undervalued common stock and deeply discounted preferred shares offer a rare combination of growth and income, supported by a strong balance sheet and disciplined capital management. For investors with a medium-term horizon, CFG represents a compelling case for capital structure arbitrage—a strategy that rewards patience and a nuanced understanding of risk.

In a market starved for yield, CFG's dual-path approach is not just a tactical play—it's a masterclass in unlocking value through strategic capital allocation.