Why Income Investors Should Consider Citigroup Inc
February 10, 2017
Citigroup Is Trading at an Attractive Valuation
Citigroup Inc (NYSE:C) stock is up 51% over the last year, outperforming all major U.S. indices and many individual stocks. With Citigroup’s excellent performance over the last year, it is time to stay away?
First off, the past performance of a stock is no guarantee of the future performance of the company. This is why is it important to view the company as a whole, based on the present and future. There are metrics and comparisons that can be used to determine if a company is overvalued or undervalued.
For instance, take the price-to-earnings (P/E) ratio, which provides the multiple that is being paid based on the company’s earnings. When a comparison is made and the ratio is lower, it signals that the company is trading at a discount.
At present, the P/E ratio for Citigroup is 11.8 times, which is less than half of the S&P 500 index’s ratio of 25.7 times. The expectation based on this ratio is that over time, Citigroup’s P/E should increase and be in line with the index.
Investors must be careful using this ratio, because a company could be trading at a discount and in fact be a “value trap.” These are companies that are trading at a discount and, with no future growth to look forward to, could be trading at a discount well into the future. Value trap companies should, unsurprisingly, be avoided at all costs.
Speaking of growth, there is much to look forward to with Citigroup, which could give a boost to C stock’s P/E ratio.
The first would be help from the economy and the U.S. Federal Reserve. The U.S. economy is growing, leading the Fed to increase benchmark interest rate. A rise shows confidence in the economy to withhold higher interest rates. There have been two such hikes over the past 14 months, with the current benchmark rate is 0.75%. The Fed now forecasts three rate hikes this year, which is even more of a reason to consider owning C stock. (Source: “Fed Raises Rates for First Time in 2016, Anticipates 3 Increases in 2017,” The Wall Street Journal, December 15, 2016.)
The second is net interest margins, which are calculated using the interest rate charged on an outstanding loan and the rate being paid based on the client’s savings account balance. As interest rates increase, net interest margins expand, because the increases have a greater impact on outstanding loans. Over time this reflects in the top and bottom line of the balance sheet positively.
For Citigroup to benefit even more from increases in its net interest margins, there must be customers willing to borrow or deposit money. According to the most recent earnings release, the company has been focusing on growing both these areas of the business. Both the loan book and deposits saw an increase compared to the previous year.
Another area of growth is the expansion into Mexico, which will be competed over the next few years. The expansion, designed to help broaden Citigroup’s global presence, will be in many different areas, including digital banking, working with small- and medium-sized businesses, and placing more ATMs around the country. This growth will take some time to be reflected in the financial statements. (Source: “Citi to Invest more than $1 Billion in Banco Nacional de México,” Citigroup Inc, October 4, 2016.)
C stock pays a quarterly dividend of $0.16 per share and is currently trading at $56.32. This is based on the current dividend yield of 1.14%. Over the past two years, the dividend has seen an increase of 1,500%.
Final Thoughts on C Stock
Based on the current valuation of Citigroup, C stock is trading at a discount—and without the worry of it being a value trap stock. In addition, the P/E ratio could see a boost as time passes and growth is realized.
Owning Citigroup could potentially result in a positive return. And while waiting to see the future growth, there is an opportunity to get paid.
