Citigroup, Inc. (“C”
$49)
Citigroup is a familiar company to most people. New York based, long history, global
footprint. However, it’s suffered
mightily over the last five years when it slid into the penalty box during the
financial storm of 2008. To an extent, Citigroup
remains there today and the signs of disfavor are easy to point out: a PE
valuation below 10x (FYF), a substantial discount to tangible book value, and a
persistent level of attention from bank regulators.
To the point, we see some light on the horizon and think
that investors should recognize both the changes that have been made and will
be made. To start with, leadership has improved. We like a Board that is chaired by Michael
O’Neill and recognize him as a banker with decades of experience and a record
of success. Further, we are confident
that Michael Corbat will guide the company through the structural changes that
will bring better focus and better financial results.
Speaking about change, one should be asking the question,
“Will Citi’s dividend jump soon?” We
think yes and consider “C” as an interesting play for dividend growth
investors. Some thoughts:
·
Current annual dividend of $0.04
·
Current dividend yield of 0.08%
·
Current payout ratio (TTM) of 0.91%
·
Dividend Coverage ratio (TTM) of 9,975%
The comparatives are interesting as well. A quick review illustrates the fact that
Citigroup has been held back due to its need to shore up its capital position
and has lagged peers in a big, big way:
Dividends
|
|||||
C
|
BAC
|
JPM
|
WFC
|
||
Dividends Paid (TTM)
|
$
0.03
|
$
0.04
|
$
1.44
|
$
1.15
|
|
Annual Yield %
|
0.08
|
0.24
|
2.67
|
2.6
|
|
Payout Ratio (TTM) %
|
0.91
|
4.25
|
33.66
|
29.07
|
|
Coverage Ratio (TTM)
|
9974.38
|
1662.24
|
320.3
|
360.43
|
|
Source: Schwab.com
The company has been using recent earnings for share
repurchases and, given their discount to book, this seems logical. Moreover, all banks are obligated to seek
approval from the Federal Reserve prior to any share repurchases and dividend
payments (Federal Reserve’s Comprehensive Capital Analysis and Review Plan) and
the bank has been moving their Basil III capital position close to the 10
percent target. Again, we keep asking
the question, “Will Citigroup’s dividend jump soon?” Others are raising this question and have taken both sides: the WSJ and Motley Fool for example. (1) (2)
Our bet is that they move it up this year and for several
years to come. We estimate a future
dividend payout ratio that is closer to 30% and, based on $4.98 estimate for
2014, this would translate to an annual dividend payment of $1.50 or
better. As such, we bought our first
shares this week.
(1) WSJ "Heard on the Street" David Reilly January 6, 2014
(2) www.Fool.com Patrick Morris November 29. 2013
(1) WSJ "Heard on the Street" David Reilly January 6, 2014
(2) www.Fool.com Patrick Morris November 29. 2013