A value-oriented firm, Diamond Hill focuses on fundamental rather than macroeconomic factors. Its record features a 125.6% return cumulatively over the past 10 years, compared to 34.9% for the S&P 500.
Diamond Hill Capital purchased 4,577,017 shares of Citigroup for $29 per share on average in the third quarter. Since the transaction, the price has risen almost 30%. Diamond Hill Capital has not traded Citigroup since it sold out a position in the first quarter of 2009.
Citigroup stock has gained 43% year to date on several developments. The bank reported on Oct. 15 its fourth consecutive quarter of earnings growth (excluding a CVA/DVA loss on its exit from a Morgan Stanley Smith Barney joint venture and a tax benefit in the third quarter of 2012), its fourth consecutive quarter of book value growth, an 11% increase in deposits and 3% increase in loans in the third quarter.
Citigroup also has $33.8 billion in cash on its balance sheet, reflecting an 18% increase from year end 2011, and had a return on average common equity of 1% in the third quarter of 2012, a decrease from 6.5% in the previous quarter and 8.4% in the third quarter of 2011.
The same day third-quarter earnings were released, Citigroup announced the resignation of its CEO, Vikram Pandit, to be replaced by Mike Corbat, who previously served as CEO of the bank’s Europe, Middle East and Africa division.
In June, the results of a federal stress test showed that Citi was one of the best capitalized U.S. banks, according to Bill Ackman. But the Fed did not approve Citi’s proposal to return roughly $5 billion to $8 billion of capital to shareholders following the results.
American International Group (NYSE:AIG)
Diamond Hill Capital purchased 2,233,645 AIG shares for $33 per share on average. Since the transaction, the price has increased 9%. Diamond Hill Capital has not traded AIG since it exited a position in the third quarter of 2008.
AIG shares have increased 53% year to date. In June, it reported results for its second quarter, which included net income of $2.3 billion, reflecting a 13.9% increase from $1.8 billion the previous year, and revenue of $3.817 billion, reflecting a 0.3% increase from $3.805 billion the previous year.
AIG also reported return on equity of 7.7%, compared to 6.6% the previous year, and a 31.8% lift in book value per share to $60.58 for the six months ended June 30 2012 from $45.97 the previous year.
The U.S. Treasury Department, a significant shareholder since the financial crisis, may sell the remainder of its shares before 2013, according to CEO Robert Benmosche. Its lockup period ends in November of 2012.
Fairholme Fund manager Bruce Berkowitz, who has a significant portion of his portfolio invested in AIG, commented on the company in his second-quarter letter: “Our best idea remains AIG (AIG) common (35% of the Fund) with a reported book value of $57 per share. There are few occasions when systemically important franchises sell for half of book value and are profitable. This is one of those times. AIG warrants held by the Fund (another 3% of the Fund) provide the right to 21+ million shares at $45, or maybe more shares at lower strike prices for the next 34 quarters if dividends above $0.675 per trailing 12-month period are paid.”
Diamond Hill Capital purchased 375,521 shares of KeyCorp for $8 per share on average. Since the transaction, the stock has gained 8%.
KeyCorp is the holding company for KeyBank National Association and other subsidiaries. KeyBank has 1,058 retail banking branches in 14 states and opened another national bank subsidiary in January.
KeyCorp shares have increased 11% year to date. In its third quarter results announced Oct. 18, 2012, KeyCorp reported net income of $214 million, or $.23 per common share, compared to $229 million, or $.24 per common share for the third quarter of 2011. Revenue increased 8.1% year over year to $1.22 billion from $1.02 billion.
Third-quarter book value increased 5.5% year over year, and return on average total assets rose year over year to 1.14% from 1.08%.
Results reflected the benefit of acquisitions, higher net interest margin due to lower funding costs, and its fourth straight quarter of average loan growth.
During the quarter, the bank also re-entered the credit card business and repurchased 9.6 million shares.
Fortress Investment Group (NYSE:FIG)
Diamond Hill Capital purchased 249,875 shares of Fortress Investment Group for $4 per share on average. Since the transaction, the stock has increased 13%.
FIG, a global investment management firm founded in 1998, has over 1,400 institutional investors and private clients globally and about $48 billion in assets under management (AUM).
FIG shares have increased 33% year to date. In its results for its second quarter, FIG announced AUM increased 3% sequentially and 9% year over year, with $1.7 billion net inflows and $0.6 billion of hedge fund redemptions.
Net income was $14 billion, an increase from a net loss of $246 million the previous year. Year-over-year improvements were driven by the expiration of an agreement, an increase in incentive income. Book value per share increased year over year to $2.18 from $2.12.
FIG paid off its only outstanding debt obligation – a corporate term loan with a remaining $189.3 million balance. After the payment, it has no outstanding term loans or revolving debt.
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