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Citigroup: Considerable Upside Following Strong Buybacks
Stock Analysis & Ideas

Citigroup: Considerable Upside Following Strong Buybacks

Citigroup (C) is a global diversified financial services company providing consumers, corporations, governments, and institutions with a broad, yet focused, range of financial products and services.

This includes consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management.

The company has roughly 200 million customer accounts, and operates in more than 160 countries and jurisdictions. (See Insiders’ Hot Stocks on TipRanks)

Citigroup’s stock has recovered fully since its fall in the midst of the pandemic, with the company producing exciting financials recently.

However, in my view, at its current price levels, the stock does not price in Citigroup’s prospects and EPS growth potential. For this reason, I am bullish on the stock.

Growing EPS

The banking industry suffers from the ultra-low rate environment, leaving little to no room for banks to benefit from spreads. Despite this, Citigroup has managed to achieve strong revenues and profits.

As its institutional and consumer businesses accumulate cheap deposits, the bank enjoys record cash inflows, which it prudently invests to achieve decent net interest margins.

Despite the company’s net interest margins continuing to decline, they stood at 1.9% in Q2, which is quite acceptable in the current environment.

Non-interest revenue also remained rather robust at $7.3 billion, while the company’s net income came in at $6.2 billion, which is the second-highest quarterly net income since Q2 2007 (with the highest being in the previous quarter).

EPS was boosted due to the company’s record net income levels, and massive stock buybacks.

Citigroup’s three-year EPS CAGR currently stands at 55.2%, and stock repurchases have significantly aided in this achievement. While buybacks were suspended in the midst of the pandemic as per regulators’ orders, they have resumed strongly.

The bank repurchased around $2.9 billion during Q2, while year-to-date Citigroup has returned around $7 billion of capital to common shareholders, which was the maximum amount permitted under Federal Reserve rules.

Assuming buyback levels resume to around $17 billion per annum, which is a reasonable estimate considering the record net income levels and Citigroup’s clear intention to maximize repurchase levels, the company would be buying 11.7% of its stock at the current market cap.

This makes for a fantastic “buyback yield.” Keep in mind that the stock’s dividend also hovers at around 2.8% at the stock’s current price. In any case, investors are likely to enjoy a dividend/buyback yield in the double digits in the medium term, even if Citigroup’s net income growth stagnates.

The risk, of course, is that net income levels could decline from here, but with an excess of liquidity out there and strong consumer inflows, Citigroup is more than likely to perform greatly in the medium term.

The stock is trading at a forward P/E of 9.8, which is an inexpensive multiple for the company, and which should allow management to buy even more stock on the cheap, further benefiting shareholders.

Wall Street’s Take

Turning to Wall Street, Citigroup has a Strong Buy consensus rating, based on eight Buys, zero Holds, and zero Sells assigned in the past three months.

At $89.75 the average Citigroup price target implies 25.2% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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