Friday, February 28, 2014

What about Citi's Dividend?

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 Paid (TTM)
 $       0.03
 $       0.04
 $       1.44
 $       1.15
Annual Yield %
Payout Ratio (TTM) %
Coverage Ratio (TTM)



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)  Patrick Morris  November 29. 2013

Wednesday, February 19, 2014

Taking Aim on Target (TGT: $56)

“Current Valuation should attract dividend growth investors”
The “data breach” story broke in January causing both Target shoppers and stockholders to react.  One thing is certain:  the full story on what happened and who has been harmed is not written.  Current estimates on the cost of Target data breach for banks has eclipsed $200 million (AP 2/18/14).  Worse, conventional wisdom suggests that almost one third of all Americans were impacted.
Target’s CEO has attacked the problem head-on and has committed all resources necessary to fix the weaknesses in their data systems.  He has asked for extensive disclosure and has approached the crisis transparently.  Some are critical of their early responses.  However, we are staking out a position that IT Security at Target is much improved and sense that shoppers are slowly returning to the stores.  Investors should reconsider as well.  And from our vantage, there are three reasons why:
·         Valuation metrics

·         Dividend Character

·         Fundamentals

TGT shares have fallen from $64 to a $56 price level today (-12.5% YTD).  Key valuation metrics read like this (source:  Schwab)--

·         Forward Price Earnings ratio of 17.6 times based on a $3.10 estimate for 2014.  This compares to a forward PE of 18.5 times for the SP500 (“market’).

·         Price/Tangible Book (MRQ) of 2.21 versus 2.75 for the market.

·         Price/Cash Flow of 6.9 versus 14.6 for the market.

·         Price/Sales of 0.48 compared to 0.51 for Walmart and 1.57 for TJX
TGT Management has demonstrated a strong commitment to paying and growing the stock’s dividend.  For us, this dividend growth character is important and will carry into the future.  To give you a sense of things, the annual dividend rate per share and other statistics have tracked as follows (source: Schwab)--
2006                $0.44              
2007                $0.52               18% increase YOY
2008                $0.60               15%
2009                $0.66               10%
2010                $0.84               27%
2011                $1.10               31%
2012                $1.32               20%
2013                $1.58               20%

2014                $1.86               18% Walrus estimate

Payout ratio (TTM)                            43.4%
Dividend Coverage Ratio (TTM)       230.3%
5 year growth rate                            27.2%
10 year growth rate                          19.1%

Fundamentally, the market has discounted recent events and 2014 consensus projections have incorporated the potential impact to both revenues and earnings this year.  Importantly, this breach event was not isolated and the TGT response is not exclusive.  Other CEO’s have followed up with their own preventative measures and the retail sector is experiencing a moment reminiscent of the “Y2K” period.
The company should generated profits near the consensus view of $3 plus this year.  Their long term goal of $8 per share EPS is still the target (as they say).  Whether they hit this target or only come close, investors should be the ultimate winners.  We have stepped up and bought the stock yesterday and will add more on any price weakness.