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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Citigroup

June 6th 2018

Citigroup

NYSE Symbol: C

Bank Industry

Price as of 6/3: $67.28

 

                The S&P 500 is up 3% year to date, but there are plenty of stocks and sectors continuing to underperform. A number of high dividend paying stocks are out of favor but look attractive. The tech sector continues to lead the charge up 13% year to date lifting the Nasdaq  9% for the year. Consumer discretion (retail) is up 8% followed by the energy space (my favorite sector) up 6%. These are the only three sectors beating the major averages year to date. Tech has been in the lead for more than a year. Energy has only started its rally.

Last year the financials were the fourth best performing sector up over 20%, but so far this year the sector has gone nowhere. The financials are the sixth best performing sector this year down one percent for the year even as the federal government continues to roll back rules and regulations making it easier for banks to lend money and thereby make more money.  Many bank stocks are significantly off their highs providing an opportunity to buy in. One large cap bank that looks attractive is Citigroup. The poster child for the financial crisis, Citigroup has made the long process of turning itself around. Ten years later, the company is generating over $4.6 billion in net income a quarter or $18 billon for the year. Citigroup has become very shareholder friendly returning $20 billion to shareholders last year and more than $3 billion to shareholders in the first quarter of this year. Citigroup expects to return a total of $20 billion to shareholders in the form of dividends and buybacks by year end. Next year Citigroup plans to spend another $20 billion on shareholders. The $40 billion from this year and next year account for 23% of the current market cap. This is an ambitious and bullish signal from management that the fundamentals will remain strong for Citigroup. Pull backs in the stock should be looked at as opportunities since Citigroup will be one of the largest buyers of their own stock. Going forward, these buybacks will keep improving earnings per share.  

Investors and analysts have warmed up to Citigroup. Activist investor ValueAct Capital Partners LP has built a roughly $1.2 billion stake in Citigroup. Leon Cooperman has built up a stake. The HSBC analyst has a $85 price target and Wells Fargo's, Mike Mayo has a $95 price target.

However, Citigroup's stock has drifted lower in the last and now stands at a 10-month low. At these levels Citigroup's stock is attractively valuated. The buybacks have already made an effect. Citigroup trades for 10 times earnings, 9 times next year's earnings and growing earnings per share by 15%. The tangible book value for Citigroup keeps improving now up to $61 share. With the stock at $67 a share, there seems to be limited downside in Citigroup with 20% to 40% upside over the next several years as the buybacks continue to improve earnings.