This article focuses primarily on Citigroup’s performance in recent years, analyzing key financial indicators to help investors see the stock as a lucrative and viable investment option. I have chosen to talk about Citigroup particularly because it has performed well in the last three fiscal quarters of the previous year, showing healthy market activity, recording handsome revenues through global operations, reporting sizable earnings per share and showing positive upward growth.
Citigroup is ranked among the largest and earliest financial services firms operating in the market today. It has operations comprehensively spread across the globe with almost 200 million customer accounts in 150 countries. It primarily generates revenues by offering deposits and loans, investment banking, wealth management, brokerage and other financial services. Citigroup generated overall revenues of nearly $78.5 billion in 2011 with earnings per share of nearly $3.70. Out of this, last quarter earnings were nearly $17.2 billion, missing the projected financial targets by a narrow margin.
Citigroup has emerged as the key player of the global financial services market in the aftermath of the global recession. It has an enormous share in the international market with a massive market capitalization of close to $100 billion and an average trading volume of nearly $47 million. The stock is trading at almost $32 at this particular juncture although a brief period of renewed trading activity and marginally improved market conditions pushed the value of the stock to almost $47.
Citigroup has a price to earnings ratio of 8.92, which is considered to be better placed against that of Bank Of America (928.92), and with earnings per share of $3.60, the business offers investors a cent for every share in dividends. Citigroup has maintained a particularly impressive dividend history in recent years with a dividend yield of 0.12% and this impressed favorable investor sentiment in the market.
Citigroup has an aggressive beta of 2.56, which did not help the business much at the time of an economic crunch. However, even in the face of adversity, and with a relatively low risk-threshold, the business managed to perform reasonably better than what most analysts had forecast after considering its aggressive beta. As a result, with improving market conditions and positive investor sentiment highly conducive of trade, the bank is poised for higher growth with a beta that promises higher growth levels compared to other leading banks.
Citigroup failed to manage an auspicious end to the financial year 2011, recording a largely dismal financial performance that fell to multi-quarter lows. However, after a closer look at the various factors that have resulted in the stock's dismal performance, it is evident that debt and credit value adjustments along with an array of additional charges and credits were largely responsible for uncertainty. This also explains why the stock was up in the previous quarter before the inauspicious close to what was largely seen as a financially sound year.
One of my key arguments in favor of Citigroup is that the company has recently resolved to tackle its cost structure on a serious note. Throughout the major part of 2011, Citigroup was seen making amends within its corporate structure rather than invigorating its drive for growth. The bank shifted its strategic emphasis largely on the containment of burgeoning credit losses and stabilization of core banking operations. As a result, the company has managed to improve its capital ratio and strengthen its financial standing largely through divestment of non-core assets such as the recent sale of its stake in India’s HDFC for nearly $2 billion.
On its agenda, Citigroup has put plans of cost-cutting on a high priority, targeting around $3 billion in overall cost reduction in the current year. Therefore, with a sizable reduction in costs, Citigroup plans to effectively increase overall revenues; it’s a simple equation. And with improving market conditions and greater favorable sentiment on the economic front, the stock price is not as subjective to violent fluctuations as it used to be. As a result, the stock will gradually trade back to its current book value of $48 a share.
I also believe that once the cost-cutting measures have finally taken shape, Citigroup will exhibit solid growth this year. The bank’s domestic consumer banking division is also expected to fare well amidst improving conditions in the American markets. Citigroup has also invested heavily in emerging markets like Asia and Latin America, returns of which were largely restricted due to economic recession. However, with the recession long gone, Citigroup has the perfect opportunity to go all guns blazing for a change in a bid to bolster its revenue and growth margins and widen its competitive moat.
With emerging economies in Asia and Latin America continuing to strengthen, the stage is ideally set for Citigroup to become a profit powerhouse in coming years. Amidst favorable market conditions, Citigroup has recently made some important announcements such as the agreement with IBM (IBM) to explore potential applications of Watson Supercomputer’s Technologies for an improved and highly personalized banking and data analysis solution.
Having analyzed leading financial indicators, I believe that Citigroup’s balance sheet is still impressive reflecting great potential for growth as well as increased revenue generation and greater cash flows. Given the recent economic outlook, I believe that the company is poised for growth in the current fiscal year. I therefore rank the stock as a "hold" in the year 2012, seeing great potential for future growth and high dividend yields. Citigroup is most likely among the more profitable investment ventures of 2012.
About the author:I'm mostly interested in income investing using dividends, preferred stocks and other debt instruments, and pair trading.
I fundamentally analyze every business from the top down.
In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.