Citigroup Inc. Is Well-Positioned For Growth In The Next 5 Years

Apr. 9.13 | About: Citigroup Inc. (C)

Citigroup Inc (NYSE:C) The Citigroup of past has turned the corner and recovered nicely from the financial disaster of 2007 - 08. There is still a bad taste in the mouth of many investors and anti-big business groups that still distrust the too-big-to-fail banks. Congress and The Fed have increased regulation on the financial sector, and the requirements to prevent the next market meltdown with some challenging metrics.

I am concerned with some new investment products Citigroup is offering; a new non-investment grade preferred stock/bonds that will pay an attractive dividends reported from 5-6% range up to 15%. This is targeting those investors wanting a better return than bonds and money market instruments at this time. Wells Fargo (NYSE:WFC), JP Morgan (NYSE:JPM), and Goldman Sachs (NYSE:GS) all have similar investment instruments as well. The allure of higher returns may blind some investors of the non-investment grade given to these products. These investments have non-investment grade ratings from Moody's, S&P and Fitch. Citigroup is taking some measures to insure them; however, over-aggressive or unseasoned buyers may not always make the best decisions with their limited resources. I will add it may be an opportunity for investors looking to gain better returns, but with a limited percentage of their portfolio. This investment would be treated as a qualified dividend income for individual investors and are eligible for the 15% tax, which could increase the value of the yield. More information will follow from Citi with a prospectus and description the investments.

All the big banks passed the 'Stress Test", however Citigroup did exceptionally well. Because it did not increase their dividend or conduct any buy-back over the previous 12 months, this may have helped with the retention of capital. Citigroup's plan for $10.5 billion dollars of stock buyback includes a $5.5 billion dollars of preferred stock that will reduce the debt column, and the $5 billion to buyback common stock (which is less than 1% of the outstanding shares), but it represents the improvement of value of stock to the bottom line for investors.

Citigroup continues to sell off none core assets. Most analysts will pick up on the lower sales numbers and call the company flat; however, the expectations of improvement in the core operations should continue to prosper. This should also reduce the requirement for cash holdings and free up some cash for additional investments, additional repurchases, or support the building of a dividend for its investors.

Citigroup is trading for 0.8 times tangible book value (estimated at $51.19) and for 9.3 times the consensus 2013 EPS estimate of $4.61. Some analysts expect Citigroup to post first-quarter EPS of $1.18 when the company reports on April 15. If they fall short of this, I would expect a drop in stock price by about 1.00. If they meet or exceed, I would expect an increase by about 1.00.

By 2014, investor's patience of a low dividend will become noise to the Citigroup leadership and respond with a sizeable dividend. I would expect a dividend of 10 - 15 cents per share that will reward investors. Less than 10 would not meet an acceptable level, and over 20 would cost the company too much of its cash reserves to remain flexible in the market place.

Another variable that many analysts fail to report on is the activity that affects the financial markets outside the U.S. The financial woes in Europe continue to press down on the banking industry. This will continue for the next few years as Europe does not have the willingness to let a Country go into bankruptcy, and the Countries do not have the will to make the hard choices to get their financial houses in order. The European Markets will flounder for the next few years.

The Asian-Pacific theater's financials are well positioned to grow into the next 5 years. Citigroup is well-positioned with them and growing their business through relationships in many countries.

I like the increase in stock price going forward, even with a dividend starting in 2014. I expect a 10% gain in stock price each year over the next 5 years. If we metric this out, it would look like: $40.91 on 2 Jan 13, to about $45 in Jan 14, to $49 in Jan 15, to $54 in Jan 16, to $60 in Jan 17 to $66 in Jan 18. This is very doable, based on the current market data, and measures the Citigroup Management Team is taking now. With the book price valued at $51.19, these numbers seem ripe for growth. Tack on the dividend and you have a very nice double-digit return.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.