Contrarian Finance

As promised, here is my complete analysis of Citigroup (C). First of all, of love the fundamentals (well, most of them anyway). Citigroup is your classic "blue chip" company. They have a multi-national footprint, and they are what's known as a Bank Holding Company. Which to me means, exposure to things that are good about being a bank (like underwriting and servicing mortgages) without one bad division (apple?) being able to drag down the whole company, like say, when real estate goes cold on you.

Let's talk price ratios for a minute. Yes I know, some people think these kind of measures are outdated, but that's what makes me contrarian, right? As an aside, if you do your homework you'll find that the historical P/E for the S&P ties right back to inflation and corporate earnings growth (and ultimately GDP). So while it may not hold for a given company and a given moment in time, these numbers always bear out in the end (note to self, this could be the subject of a whole other post). Anyway, Citigroup has a current P/E (as of close of trading on the date of this writing) of 12.1 versus an industry P/E of 13.4. Which is saying something when you consider ho much of the "industry" is in fact, C. Price/Sales (2.83 vs 3.37) and Price/Cash Flow (10.5 vs 11.2) are below industry peers as well, and Price/Book (2.14 vs 2.04) is about on par, though slightly above. All of these are well below the S&P ratios, with the lone exception of Price/Sales.

Let's talk dividends, yes, you heard me, dividends. I know what you're thinking: BORING. Exactly. Which is what everyone else is thinking too... I think you see where I'm going with this. Citigroup has grown their dividend at an astounding 27.62% over the last five years. In fact, they've raised their dividend every year for almost the last 20 years. Reinvesting the dividends can really boost your return over the long haul too (this a key component of my Tier 2 strategy, more on that later).

Now, I don't think they can sustain these growth rates, after all, they're HUGE. The analysts, who are down on C, have their 5 year earnings growth estimated at 10.5% a year. So let's use that for the next five years, then dropping 1% point every other year until we get to the GDP + Inflation growth rate (6%). So that's 10.5, 10.5, 10.5, 10.5, 10.5, 9, 9, 8, 8, 7, 7, and 6 for forever after. For a financially responsible company, which Citigroup is, in my estimation, they aren't likely to grow the dividend faster than earnings growth. But matching the growth is a reasonable assumption, given our conservative growth rates. Do a little magic in Excel, and you'll get a DCF value for the dividend stream of $53.85. But wait, you say, that's below their last close of 50.22! And so you are starting to see the method to my madness.

Citigroup is also a an all time high for dividend yield of 3.94%. Given their history, and financial status, we have no reason to believe the dividend will be going down, or even staying the same. The historical average yields are mostly in a range from 1.0% (low) to about 2.2% (high). Even if it trades to the high end of that range, it wouldn't be at all crazy to see the price move to $90 (a 2.1% yield). Let me save you pulling out your calculator, that's almost an 80% return. Oh, plus the 4% yield. Even if it took three years to come back to the high end of the range, you could see a 20%+ annualized return... not bad right?

Of course, I wouldn't even think about selling until the price pushed the yield near the 1.0% percent mark, which would put my target price at $190. OK, I'm dreaming, but I also don't mind holding this stock... forever. Yes, I put this in the Warren Buffett category. Just buy and hold it forever, unless somehow it gets really pricey (and it has in the past; twice in the last 20 years).

Oh, and I'd also reinvest the dividends. Through the Citigroup DRIP (which is fee free, by the way). Unless of course it got too pricey.

So here's the summary: I love this stock under $50. I like it under $55. And I'd still hold onto it up to about $90 or so, at which point I'd start selling it off in chunks. I'd reinvest the dividend stream as long as the yield is above 2.0%. Another tibdit: the 5-year high P/E for Citigroup is 21.8, which is about $90 based on their current earnings.

I welcome, as always, your feedback and comments. And yes, if you must, your criticism.

A parting shot... not that you care what Wall Street types are doing, but check out Citigroup on Gurufocus.com. Dodge and Cox upped their stake in Citigroup by almost 40% earlier this year, at an estimated price of about $46. That brings their total shares to over 40 million.