Citigroup: Earnings Showed Mixed Results; What to Consider

Citigroup (C) is a diversified financial services holding company operating in the United States and internationally.

The company provides retail services to individuals and small businesses through checking and savings accounts, credit cards, and lending services. Citigroup also services institutional clients and provides brokerage services, investments banking, advisory services, and corporate lending.

Investors generally reacted negatively to Citi’s Q4 2021 and full-year earnings, and the stock now sits over 17% down from its 52-week high.

I am neutral on Citigroup stock.

Q4 Earnings Update

For Q4 2021, Citigroup reported revenue of $17 billion, primarily in line with estimates. Its non-GAAP earnings per share (EPS) beat the estimate by $0.33 and came in at $1.99. GAAP EPS was $1.46 on $3.2 billion in net income. EPS was down from Q3 2021 when the company posted $2.15 per share.

Citigroup continues to revamp its current business model and has incurred significant expenses as a result. According to the company, the wind-down of its Korean consumer business costs $1.2 billion in earnings before interest and taxes. These expenses are necessary as the company continues its transformation.

Citigroup has also announced that it is exiting consumer and small business banking in Mexico. It will continue to serve institutional clients in Mexico. Citigroup reports that the businesses it will be exiting in Mexico provided $4.7 billion in revenue and $1.1 billion in net income in 2021.

Upon divesture from these businesses, the influx of capital will allow the company to return capital to shareholders and create a leaner, more focused organization overall. There is no reported deal in place as of now.

Valuation Remains Attractive

Citigroup’s stock has had trouble gaining traction of late, having fallen significantly since the summer of 2021. This has left the stock with an attractive valuation, despite the noted headwinds related to expenses.

The company reports a tangible book value per share of $79.16 as of the end of 2021, significantly above the current share price. The forward price-to-earnings (P/E) ratio stands at 8.5 on a forward basis. This is much lower than Wells Fargo and JPMorgan and reflects investors’ hesitancy to buy into management’s vision.

Citigroup provides investors with a safe dividend and solid 3.05% yield currently. The quarterly payout is $0.51, and the payout ratio is just 26%. Citigroup also typically buys back significant amounts of stock.

However, this was halted in Q4 2021 due to regulatory reasons. According to the company, buybacks will resume this quarter. In total, the company returned $12 billion in capital to shareholders in 2021.

Share buybacks serve a couple of significant functions. First, they support investors in the marketplace by providing a base level of demand for shares. If shares dip, management can step in and increase repurchases. These repurchases make sense as the company trades at a discount to tangible book value.

Second, the EPS will increase by reducing the number of outstanding shares. Finally, this return of capital to shareholders is tax-free, unlike dividends on which investors are taxed.

Wall Street’s Take

Turning to Wall Street, analysts are somewhat bullish on Citigroup stock, with a Moderate Buy consensus rating based on nine Buys and seven Holds. There are no Sell ratings on the stock.

The average Citigroup price target of $77.45 implies 18.6% upside potential.

Citigroup Conclusion

Citigroup continues to transform its business, and this has caused some short-term headwinds. Increased expenses have hampered results. The company was also forced to pause the share buyback program in Q4 2021. This was inopportune as shares swooned during this period.

There are also reasons for optimism. Management appears to have a vision of a leaner, simpler enterprise which could be more successful. Share buybacks will recommence this quarter, and investors can count on a safe dividend with a solid yield. Citi’s valuation is reasonable and well under the tangible book value per share. This reflects investors’ prudent wait-and-see approach to Citi stock.

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