Citigroup (C): 2019 Top Picks' Mid-Year Update

07/17/2019 5:00 am EST

Focus: FINANCIALS

Jason Clark

Contributing Editor, The Prudent Speculator

Jason Clark, contributing editor to The Prudent Speculator, chose Citigroup (C) as his favorite investment idea for 2019. The global banking firm rose 35% in the first half. Here's the latest update from the value investing expert.

While in the first half of 2019 shares of Citigroup enjoyed a total return of more than 36%, we be­lieve there is still more near- and long-term upside available to investors as the stock has been held back by excessive concerns around declining interest rates and global trade tensions and their potential impact on the company’s globally diversi­fied business model.

Citigroup shares still offer a compelling valuation, currently trading at less than 9 times next twelve months adjusted earnings per share consensus analyst expectations, and just 91% of book value per share. Addition­ally, we still see a more focused and recapitalized Citigroup as prepared to reward investors over the long-term.

We like that C has good leverage towards the solid U.S. econ­omy, while also having the potential for growth in Asia, Latin America and other emerging economies.

Citigroup also derives a meaningful part of its top- and bottom-line from Mexico, so the recent avoidance of a dust up between the U.S. and Mexico, plus the potential for the United States-Mexico-Canada trade agreement to be approved in the somewhat near-term are both positives.  

Furthermore, we see Citi’s vast network in Asia as an actual advantage for the bank as it has local, country-level banking licenses, and these businesses are funded by local currency. Therefore, Citigroup should have an even stronger ability than many competitors to service multinational clients should trade tensions further escalate.

Typically in these scenarios, there is greater demand for banks as intermediaries in cross-border payments and services when trade tensions exist, as corporations tend to be a bit more hesitant to directly deal with one another.

Despite near-term revenue headwinds, we think the bank is on its way to achieving its low 50s efficiency-ratio target by 2020. And, following the Dodd-Frank Act Stress Test 2019 results, C just announced a planned 13% increase in its quarterly dividend from $0.45 to $0.51 and the repurchase of up to $17.1 billion of its stock over the next year.

The current dividend yield for C shares is 2.5%, and if the share price didn’t change the increased dividend, which is expected to start paying in Q3 of 2019, would bump the yield up to 2.9%.

Citi CEO Michael Corbat commented: “At Citi’s Investor Day in 2017, we announced our goal to return at least $60 billion in capital to common shareholders across three consecutive CCAR cycles, subject to regulatory approval. When the capital actions announced today are complete, that goal will be achieved. Looking ahead, we are focused on continuing to serve our clients with distinction, improving returns for our shareholders and making the investments necessary to ensure safety and soundness.”

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