Note: I use the Stock Selection Guide Software and its methodologies from the CSA to perform the bulk of my analysis on stocks. This is not a recommendation to buy a stock – it is my analysis only. Please do your own research.
Citigroup Inc. (Citigroup) is a diversified global financial services holding company whose businesses provide a range of financial services to consumer and corporate customers. The Company is a bank holding company. Its segments include Global Consumer Group, Corporate and Investment Banking (CIB), Global Wealth Management and Alternative Investments (AI). Citigroup has more than 200 million customer accounts and does business in more than 100 countries.
Revenue Profile and Projection:
Let’s start by examining management’s ability to convert the companies products and services into increased sales on a consistent basis, year after year. To pass the revenue test, the company must possess the following two attributes:
1. a steady and consistent revenue uptrend
2. the ability to continue to grow revenues in the future, giving consideration to such things as demographics and market trends (i.e. the move from film to digital)
The revenue profile:
The revenue profile for C is presented below. The revenue trend is up over the 10 year period we see here, but there are some periods of revenue declines which I don’t typically like to see. Even if companies shed assets, I like to see real consistency as I do not hold a lot of stocks in my portfolio and therefore need to be very stringent. The company has recovered from the drop in revenues in 2001 and 2005, but a company this size has difficulty growing revenues at a high rate.
Being conservative, but not too conservative, a revenue growth rate must be extrapolated to project a revenue number 5 years from now. This will not be an exact science but will provide us with a projection of what revenues you can expect the company to generate in the future. This is important because it is revenues that lead to earnings. One important thing to consider is whether revenue growth is accelerating or decelerating – this helps make a judgment call on what growth rate to apply.
Historical Growth Rates:
|1 – 10||13.6%|
|1 – 5||3.4%|
|1 – 2||6.7%|
|Last 3 Quarters||N/A|
We can see the sketchy revenue profile reflected in these different growth rates for C. The ten year period is a strong 13.6%, however more recent growth rates have been much lower. Going forward, an investor would need to base their decisions on these lower growth rates in my opinion. It is also uncertain what the future holds for the company given the subprime mortgage mess they have gotten themselves into. Based on this revenue growth data and the uncertainty, I have chosen to project revenue to grow at 5% which would mean, at the end of 2011 the revenue for C will be approximately $119,925 million per year.
EPS Profile and Projection:
I want to now move onto looking at the company’s earnings per share – how well the company turns those revenues into earnings for shareholders. To pass the EPS test, the company must possess the following two attributes:
1. a steady and consistent EPS uptrend
2. the ability to continue to grow EPS in the future
The EPS profile:
The EPS profile for C is presented below and again it shows real choppy growth. As I have said many times before, I would prefer to see a more flat uptrend without all the choppiness in the trend line. Consistency is crucial to a stock price and we do not see that with C’s EPS performance.
Just as with the revenue projections, being conservative, but not too conservative, a EPS growth rate must be extrapolated to project a revenue number 5 years from now. This will not be an exact science but will provide us with a projection of what EPS you can expect the company to generate in the future. Again it is important to consider whether EPS growth is accelerating or decelerating – this helps make a judgment call on what growth rate to apply.
Historical Growth Rates:
|1 – 10||14.2%|
|1 – 5||9.5%|
|1 – 2||11.3%|
|Last 2 Quarters||N/A|
The EPS growth rates are consistent with the trend line we just saw, but it does appear that the company has been able to realize good EPS growth. The growth rates are lower than the full 10 year growth rate and has picked up in the past 2 years. However, given the subprime mess I think an investor should be pretty conservative with the number to help build in a cushion when we get to pricing the stock. As such, I have estimated that the 5 year earnings growth rate for the company to be at 5%. At the end of 2011 the EPS for C will be approximately $5.42 per year.
As a dividend investor, I of course look at dividends. Usually, I already know at this point that the company at least pays a dividend and has a strong history of increasing their dividend payouts on a consistent basis. The only analysis I do on dividends at this point is to quickly look at the dividend history over time. I want to see at least 10 years of uninterrupted and growing dividend payments to shareholders. Here is C’s dividend chart:
The dividend growth performance is where Citigroup really shines and it is the main reason buy into the company. It saw a high spike in 2003 and I don’t think that we will see increases like that in the near future given recent events. Another bonus with Citigroup is the current dividend yield of 6.4%, which is much higher than iShares Dow Jones Select Dividend Index (DVY) the yield you would get is 3.60. The extra cushion provided by the high dividend yield will potentially help investors weather a slow recovery for the company.
Share Price Valuation:
I use 2 methods to compare a company’s share price. The first is looking at the dividend yield to see how the current yield compares to the 10 year average yield for the company. The second is determining a buy range for the stock through the analysis of the recent price for $1 of EPS in relation to historical prices. Here is my results of my valuation.
Current Dividend Yield: 6.40%
Average Dividend Yield for past 10 Years: 2.30%
Is the current dividend yield higher than the average dividend yield for past 10 years: Yes
With an average dividend yield over the past 10 years of 3.6% and a current yield of 3.0%, the stock is priced well below historical yields. The question is whether the dividend yield is at risk of a dividend cut.
Recent Price (how is the current price sitting in relation to historical averages):
EPS Projected Growth Rate: 5%
Recent P/E ratio: 8.0 (= current stock price dividend by current year projected EPS of $3.99)
Relative P/E ratio: 0.55 (= recent P/E divided by 10 year average P/E)
Based on a relative P/E of 0.55, buying the company today would indicate that we are buying at a price that is much lower than its 10 year historical P/E value (a discount of approximately 55%). This is a positive sign from a valuation perspective.
Upside Price (based on the EPS projection, what price might we expect if the growth continues on the trend we saw in our analysis of revenue and EPS):
Upside price: $54.20 (= upside EPS in 5 years X upside P/E ratio in 5 years)
Upside P/E ratio: 14.5 (= 10 year average P/E ratio)
Downside Price (based on the EPS projection, what price might we expect if the growth continues on the trend we saw in our analysis of revenue and EPS):
Downside price: $28.72 (= current price – (1 – 20% decline))
The buy range C is $28.72 to $37.21
This is calculated by:
(Upside Price minus – Downside Price) divided by 3 = $8.50 which is the size of the buying zones I use (buy/wait/sell). The buy zone is simply the downside price plus the zone size.
Even with the gain that we saw on Tuesday, the stock is down significantly off of its high. In fact this stock has tanked. The trouble is, if it were not for the stocks awesome dividend increase record and current dividend yield, the sketchy earnings and revenue history would make this stock one to avoid. Add to that the recent uncertainty around the future given the subprime mess, and the risks are pretty high. The discounted price may potentially provide for some significant upside but it may take awhile to get back to recent highs. That being said, I have owned Citigroup for sometime now and will not be selling as the dividend is just too strong. I will not be adding any either as my banking exposure is too high. I will be reinvesting any dividends into more stock however.
Disclosure: The Dividend Guy own sshares in C. This is my analysis of the stock and is not investment advice. Do your own research.