Citigroup’s Buyback Pause Is a Short-Term Headwind

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

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

I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)

Stock Buybacks on Pause, Dividend Unchanged

Citigroup stock has dropped considerably over the last 30 days, falling over 10% during this time. In addition, the stock is about 25% off its 52-week high. Part of the decline is likely attributed to the share buyback pause that was instituted in Q4 2021.

Because of a capital requirement rule, the company was forced to halt buybacks, although Citigroup believes that buybacks will recommence in Q1 2022.

Citigroup has still repurchased over $7.4 billion in stock over the trailing twelve months (TTMs). This is more than 6% of the current market cap. The loss of demand from stock buybacks certainly hurt the share price in the short term; however, this should be resolved come 2022, provided the buybacks recommence as promised.

Citigroup failed to raise the dividend in addition to the pause on buybacks. The dividend has been set at $0.51 quarterly per share since Q3 2019. It was not expected that it would be raised during 2020. It was held constant in 2021 as well, despite a significant rise in net income.

The current yield stands at a pedestrian 3.4%. Citigroup had been raising the dividend consistently since 2015 before 2020. The company is currently going through another strategic transformation, so investors should not expect a raise anytime soon.

The Valuation Is Tempting

The issues mentioned above have given investors pause, and the stock is now trading at a compelling valuation, albeit with the risk of continued underperformance attached. The stock currently has a price-to-earnings (P/E) ratio of just 5.7. This is well under the pre-pandemic valuation near 10 in 2019 and suggests possible significant upside if investors jump on board.

It is a shame that share buybacks have stopped as the company could capitalize on the low valuation to reduce the share count.

Inflation is a major issue in the U.S., as it has risen to nearly 7% of late. This means that interest rate hikes are likely in the very near future. Citigroup, being a lender, could potentially benefit from a rising rate environment. Fixed-interest investments would return more capital as well.

Unfortunately, a downturn in economic activity due to inflation would be a net negative. The rise of interest rates is a double-edged sword in this way to a company like Citigroup.

Wall Street’s Take

On Wall Street, analysts are somewhat bullish on Citigroup stock, with a Moderate Buy consensus rating based on seven Buys and four Holds. Of note, there are no Sell ratings.

The average Citigroup price target of $79.43 implies 31.9% upside potential. Even the low target of $67 carries significant upside potential.

Summary on Citigroup

Citigroup surprised many investors with the pause on share buybacks. The timing of this was problematic as it has coincided with a market downturn. The company could be using this time to repurchase shares rather cheaply and support the stock price near $60 per share.

Instead, the company must work to meet capital requirements so they can resume in 2022. The dividend is consistent, but investors hoping for a 2021 raise were disappointed. The valuation appears quite tempting; however, investors should beware of buying into a value trap. Citigroup remains a Hold for now.

Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.