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Cody Eustice
Articles (553)  | Author's Website |

Citigroup: Still a Great Long-Term Investment

Citigroup currently offering a 13% pretax earnings yield

March 28, 2018 | About:


Citigroup (NYSE:C) is a global franchise bank with a unique competitive advantage over its competitors thanks to having more banking licenses in more than 100 countries. The bank has been a leader in global banking for over 20 years. Citigroup continues even now to expand its operations around the world. The bank offers a broad and diversified portfolio of financial products which drives customer growth. Currently, Citigroup produces over $1 billion in revenues in eight Asian markets including China. The bank continues to add to its banking licenses, which lead to more profits. Citi recently became the first U.S. bank to obtain a license for internal bank bond settlements in China. Citigroup's most attractive asset is its global reach, which is quite impossible for competitors to replicate in today's regulatory environment.

Since the financial crisis, Citi and other large banks have had to maintain larger capital reserves than normal, resulting in the lower return for shareholders. The higher capital reserve requirements have hindered Citi more than its competitors. Recently the Federal Reserve authorized Citi and its competitors to return more capital to shareholders. This will be a major boost for shareholder return going forward. Citi has doubled its dividend and authorized a share repurchased program of $15.6 billion.

2017 financial results

In 2017 Citi saw net earnings increase by 6% to $15.8 billion or $5.30 per share on revenues of $70 billion. The bank continues to see growth in underlining revenues and earnings thanks to its strong global franchise. Over the last five years, Citi had been able to achieve 5.4% growth in economic earnings.The bank hit its target in 2017 with an efficiency of 58%, up 150 basis points from 2016. Citi increased its return on assets by 84 basis points and increased return on tangible common equity to 9%. Management believes they will achieve a 10% ROTCE of 10% within a few years. In 2017 the bank reduced its shares outstanding by over 200 million through returning $17 billion to shareholders. The ability to return excess capital to shareholders should increase returns on equity and assets going forward for Citigroup.

Citigroup like other large banks has had to maintain high capital ratios since the financial crisis, with the bank maintaining a Tier 1 Capital ratio of 14.1% and a Total Capital ratio of 16%. The bank plans on returning an excess of $40 billion to shareholders if the Federal Reserve approves. Citi management seems very confident that the Federal Reserve will approve its capital return plan.


Currently, Citigroup shares trade for 12.8 times 2017 earnings and 7.9 times its pretax earnings. In 2017 the bank saw pretax earnings of $22 billion, or $8.74 a share, and $15.8 billion, or $5.33 a share, in after-tax, offering investors a pretax earnings yield of 13% and after-tax yield of 7%. That compared to Treasuries offering less than 3% in the 10 years.

Investors are getting a business with a growing yield on Treasury and corporate bonds. Based on pretax earnings, Citi's current stock price is trading at a 22% discount to pretax earnings valuation method.

Warren Buffett (Trades, Portfolio) uses pretax earnings as a value metric. He likes to purchase companies selling for 10 times their pretax earnings. Citigroup should see organic earnings growth of at least 4% for the next 10 years. This doesn't include share repurchases and increases in dividends. In 10 years, pretax earnings will grow to $19.92 per share and after-tax earnings of $7.89 per share. A 10 times multiple puts the value range between $78.90 to $199.20 per share on projected earnings. 

Disclosure: I do not own shares of Citigroup or plan to in the next 72 hours.

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Ed_l_grey - 1 year ago    Report SPAM

Citi has a long history of helping build bubbles that turn into crashes. There was a Motley Fool article that gives some detail about this.

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