Now Is The Time To Buy Citigroup

Dividends Matter reader Daniel has requested that we have a look at Citigroup Inc. (C), which trades on the NYSE. With all the financials getting slaughtered lately, is this an opportunity to add Citigroup Inc. to our portfolio of superior dividend yielding stocks?

Company Profile:

From Yahoo Finance

Citigroup, Inc., a multibank holding company, provides various financial services to customers in the United States and internationally.

Its market capitalization is $241.72B.

Company Fundamentals:

As usual, I will start with the return on invested capital. And like all financials, I was only able to obtain the 5-year average ROIC of 6.3%, and last year’s ROIC of 5.28%. In these cases, I definitely look at the return on equity for more information.

In this case, Citigroup Inc. has consistently produced an ROE of almost 18%. The 10-year average ROE is 17.81%, and the 5-year ROE is 17.58%. It shows a good, solid, and consistent return on equity.

Its equity growth rates have been declining over the last 10 years. The 9-year average equity growth rate is 13.17%, the 5-year average is 9.66%, and the 3-year average is 8.64%.

Its earnings per share growth rate has been consistent with the equity growth rate. The 9- year average EPS growth rate is 14.3%, and the 5- year average is 9.73%. Unfortunately, the last 2 years have not been as good. In 2005, the EPS growth rate was -3.41%, and last year’s rate was 4.55%. There have definitely been some up and down years for EPS growth rates.

Its sales growth rates have also been improving over the last few years from some downright pitiful years in 2001 to 2003. Last year’s sales growth rate was 22.68%.

From a fundamental point of view, Citigroup’s management has delivered an excellent, consistent return on equity.

Dividend Fundamentals:

Citigroup Inc.’s current dividend yield is a very healthy 4.47%. This easily outpaces any yield offered by either the S&P 500 index or the DJIA. However, it is inline with many of the other financials that we have analyzed recently (U.S. Bancorp (USB), Bank of America (BAC), Washington Mutual (WM)).

Not only does Citigroup Inc. offer a healthy dividend, but it has had some of the best dividend growth rates I have seen. The 9-year average dividend growth rate is 29.72%, and the 5- year average rate is 29.54%. However, it does come back to earth over the last 2 years with growth rates of 10% and 11.36%, respectively.

The dividend payout ratio has been steadily increasing from a low of 15.75% back in 1997 to its current 47.34%. With dividend growth rates close to 30% over the last decade, it's no wonder the payout ratio has grown so quickly!

Valuation Models:

Let’s have a look at what value our 3 models place on this stock.

From a dividend yield perspective, Citigroup Inc. is currently yielding more than its historical norms. The 5- year average high dividend yield is 3.75%. However, the last 3 years have all been above that mark at 3.8%, 4.1%, and 4.37% respectively. However, the current 4.47% is still an all-time high. Obviously this stock will be selling at a discount using this method.

If we demand the 5-year average high dividend yield, then the target price is $57.53. At the current price of $48.35, that is a discount of almost 16%. However, considering that the high dividend yield has been increasing each year, the 4.47% yield is probably a fair yield.

And even Benjamin Graham would agree that this stock is valued fairly! The Graham number is $49.48, which implies a discount of just 2.29%.

For my discounted present value method, I used the following inputs:

A future EPS growth rate of 9.66% (this was determined by taking the 5 year average equity growth rate).

However, analysts have forecast 10%, so here I will use my more conservative estimate.

A future P/E of 10.74 (this is the current P/E and is a historical low).

A dividend yield of 3.75%.

A future dividend growth rate of 11.36% (last year’s dividend growth rate which is far below the average dividend growth rates).

With this information in hand, the model price is $53.31. That represents a discount of 9.31%.

All 3 models show this stock trading at a discount. Have a look at my calculations.

Here is the 1 year stock price chart:

click to enlarge

As you can see, Citigroup Inc. has come down quite a bit from its highs.

Conclusion:

All the financials are getting slaughtered over the sub prime concerns. Is this an opportunity to buy a great dividend yielding stock while the rest of the herd is running for the hills? All 3 valuation models point to a buy.

What is your opinion?

Full Disclosure: I do not own any shares in C.

Comments

[phdinsuntanning]

buy a few ones for yourself, you re really convinced,
I am sure today will be a great day to do it...

[Richie]

Bad luck your call was so bad !!! But maybe it's not just you. Look at C's asset base --- in other words, there equity level relative to their debt --- scarry. And they are involved with many tens of billions of dollars in derivatives. Do you know what their exposure is? Nor do I --- nor does anyone else. Do you know their value --- nope --- and neither does anyone else. So what are you buying if you have no knowledge of their basic business and cannot get access to it???

[Jamiml]

wait