Stock of the Week

Buybacks & Big Banks

October 1st 2018

Citigroup (C )

NYSE Symbol: C

Industry: Banking

Price as of 9/28: $72.34


2018 will be known as the year of the buybacks. Flooded with cash from the cut, US public companies announced a whopping $436.6 billion worth of stock buybacks, according to research firm Trim Tabs. Not only is this the most ever, it nearly doubles the previous record of $242.1 billion. S&P 500 companies repurchased $189 billion worth of stock during the first quarter, topping the record set in 2007. The second quarter will also be a record. May set a record for share repurchases, and the month was the best for stocks since January and the best May since 2009. Companies are expected to push $2.5 trillion of "flow" into the economy this year in the form of share buybacks, dividends and M&A, according to UBS. No surprise, the S&P 500 is up 10% year to date. Ironically, mutual funds have seen a net outflow of $57.1 billion this year from retail investors. August followed up May as the busiest month of the year for buybacks. Goldman anticipates that the corporate appetite will be even stronger into year-end.

With all the buybacks, you don't have to over think your investing.  The buybacks have been skewed toward tech stocks, which have easily outperformed the rest of the market. The tech sector is up 20% year to date after rallying 40% last year. Apple alone announced plans for $100 billion in buybacks. Apple alone bought back $22.8 billion of its stock in the first quarter, the most of any company in any quarter in US history. Apple is literally in the markets every day buying back their stock. Warren Buffett did the math and has made Apple his largest position. Apple is up 35% year to date and should continue to perform well with three new iPhones and the upgrade to 5G coming next year.

Outside tech, the oil space and the financials are my two favorite sectors. Thanks to rising interest rates and reduced regulations and an easing of the required reserves held by the banks, the big banks are now announcing dividend hikes and large share buybacks. Besides Apple's buyback, four of the next five largest buybacks are big banks. Wells Fargo (WFC), JPMorgan Chase (JPM) Citigroup (C ) and Bank of America (BAC) each said they would buy back at least $20 billion of their own stock after the Federal Reserve gave them a clean bill of health.

Of the large banks, Citigroup looks the most attractive trading for 10 times earnings and just 9.5 times next years earnings. Citigroup also has the cheapest book value at just 1. The dividend yield of 2.4% is good, but the best part of the story is the buyback. A $20 billion share buyback accounts for 11% of Citigroup's market cap. Citigroup is expected to buy back another $20 billion next year or 20% of their market cap over two years. Similar to Apple, a stock pick you don't have to over think.  

Bank of America (BAC) is the second cheapest stock trading for 11.6 times earnings and 10 times next years earnings. Bank of America dividend yield is just 1.99%, but trading for 1.2 times book value and their $20 billion share buyback which accounts for 6% of their market cap should boost the stock.  

JP Morgan Chase (JPM) is the biggest and best of the big banks and as expected the most expensive bank stock trading for 12 times earnings and 1.6 times book value. The good news is the dividend yield is 2.8%. Their share buyback is worth $20B which accounts for 5% of the market cap.