Citigroup: My Top Value Idea Which Also Yields Over 5% (NYSE:C)

Value is an interesting concept. The technical definition is the monetary worth of something, but when it comes to investing, allocating capital toward equities that appear to trade for less than their intrinsic or book value is the premise behind value investing. As humans, we have independent opinions, and what is perceived as value to one person may not correlate to value for another. The decision about what equity I would nominate for my top value idea didn’t come easy because there are many aspects to consider. If an equity is trading at a higher-than-average P/E, but its share price appreciates by 30%, is that a representation of value investing? I believe there are many companies that are undervalued, and there are some companies that I am very bullish on that may seem expensive today, but they could grow into the current valuation and deliver large returns in the future. Is one concept more valuable than the other? There are companies such as Altria Group (MO) and PayPal (PYPL) that I believe are tremendous value plays; then there are other companies such as Palantir (PLTR) and SoFi Technologies (SOFI), which are the furthest examples of value companies, but I believe they can each become multi-baggers over the next 5-10 years.

I looked through the Invesco S&P 500 Enhanced Value ETF (SPVU) and SPDR Portfolio S&P 500 Value ETF (SPYV) to see what equities they consider value stocks, and I was surprised at what made SPYV’s top-10 holdings. SPYV has a 19.17% allocation toward technology, and three of what is being coined as the Magnificent Seven can be found in their top-4 holdings. SPVU, on the other hand, only has a 1.36% exposure toward technology, and none of the holdings in their top-10 are tech companies. This goes back to my earlier question about what value is because some may view value as paying a lower price today for an asset than it will be in the future or paying a current price that is discounted from what you believe the actual value for the asset is. I can make a case for both methodologies, but when I think of a value stock, I think of an equity currently trading under where I believe the fair value should be. I also look favorably upon companies that are paying a dividend because it could take months or years for my investment thesis to work out, and I would like to get paid while I wait. After analyzing different factors, Citigroup (NYSE:C) has become my top value idea. This wasn’t an easy decision, as I am placing Citigroup above Altria Group and PayPal.

What value means to me and why Citigroup fits the criteria

Value can have a different meaning from investor to investor, and while you can make investments today that will look like you got an excellent value from your allocated capital, your initial investment may not represent value at first. When I think about value in regard to investing, my mindset shifts to stocks that are trading at prices that I feel are below their fair value rather than what could mature into a multi-bagger. Tesla (TSLA) is a perfect example, as TSLA has never been considered a value stock as it’s always traded at a high P/E or P/FCF valuation, but it’s been a multi-bagger for many investors, and they have squeezed immense value out of their investment in TSLA. When I look for value, I look for companies with the following aspects:

• companies that are trading just above a multi-year support level
• companies trading near their one and five-year lows
• companies that trade at a discount to book value
• companies that pay a dividend (annual increases are a plus)
• companies that have growing EPS
• companies that are profitable
• companies that are buying back shares

For me to classify a stock as a value stock, the company doesn’t need to check off every box, but I do want it to have many of the attributes I have listed above. In my opinion, companies that are trading above long-term support have likely bottomed, and if they trade at a discount to book value, you’re paying a deep discount for their shares. Companies that pay a dividend typically have a strong understanding of their internal financial trend and external business trends as they need to forecast out several years to pay investors a portion of their current EPS. A dividend signals that a company could be more financially stable, and having a track record of growing the dividend indicates that they can generate more than enough profits to grow its business while paying investors a portion of the profits. I want to see projections for growing EPS because then there is more of a chance that upgrades can occur after strong earnings reports in the future. I want to invest in companies that are profitable because they have established a viable business, and it’s not a guessing game as to whether they will succeed. Buybacks are important to me because it signals that management believes shares are too cheap, it’s the most tax-efficient return of capital to shareholders, and every time shares get repurchased, the revenue and profits are split across fewer shares, which reduces the amount of earnings allocated toward the dividend and increases the ownership percentage that outstanding shares represent.

The showdown between my top value picks

As I indicated earlier, this wasn’t an easy decision, but after looking at the data, Citigroup is my best value idea. I am not saying it will produce the largest returns from this cohort of companies, but based on its current valuation, I think it’s the most undervalued company compared to where I see fair market value being.

The companies that I feel represent the most value are:

• Citigroup (C)
• Altria Group (MO)
• PayPal (PYPL)
• Cisco Systems (CSCO)
• Chevron (CVX)

In addition to disclosing what positions I am invested in at the end of the article, I want to disclose before going through my analysis that I am a shareholder in Citigroup, Altria Group, PayPal, and Cisco Systems. Of the four companies, my investment in PayPal is significantly larger than my investments in the other three as I feel PayPal has the best opportunity of generating the largest returns in the group over a several-year period.

Of these companies, Cisco Systems, and Chevron are not near their multi-year lows. PayPal and Verizon are still falling and haven’t established a support level in the past year. Verizon has a 52-week range of $30.14-$44.72 and trades at $30.67, while PayPal has a 52-week range of $55.53-$92.62 and trades at $55.75. Both are trading at their 52-week lows, and support levels have not been established. While support could be established over the next month, the trend could continue to spiral downward if Q3 earnings are perceived as weak. On the other hand, Citigroup has recently established a 52-week low, found support, and bounced off the support level thrice.

In the past 52 weeks, Citigroup dipped below $40 momentarily, but as it approached $40 on September 11, it bounced from $40.59 to $42.37 over the next three days. On September 26, Citigroup hit $40.22 and bounced off the low to $41.13 on September 29. Citigroup then breached $40 momentarily on October 5 and ran up to $41.53 on October 12. When I look at Citigroup’s long-term support level, it was established in May of 2020 just above $40. Citigroup approached $40 in October of 2020 and ran from $41.13 on October 28, 2020, to $79.49 on June 4, 2021. Since reaching their 2021 highs, Citigroup has declined and made a short-term bottom of $44.14 on July 14, 2022, $40.84 on October 12, 2022, $43.11 on March 24, 2023, $40.59 on September 11, 2023, $40.22 on September 26 and $39.14 on October 4. Each time these lows were reached, Citigroup bounced off the lows, and the sub-$40 pricing looks like an anomaly as it didn’t create another downward trend. When I look at the chart, I see consolidation into a bottoming process, and I don’t think Citigroup is going lower.

Book value is something that I feel investors don’t look at often. The book value of a company indicates its value based on the amount of common shareholder equity in the company. To arrive at book value, the sum of all the line items in the shareholders’ equity section on a company’s balance sheet must be totaled. This includes preferred stock, common stock, Treasuries, paid-in capital, additional comprehensive income, and retained earnings. When I look for value stocks, I look for companies that are trading near book value or under book value. Citigroup trades at a -58.27% discount to book value; even if shares doubled in value, it would still trade at a discount. This is what I consider deep-value territory.

Due to the deep discount to book, I went back over the past decade and looked at the book value and share price at the end of each fiscal year since December 2013. Citigroup has traded below book for almost the entire decade, and since the pandemic, the gap between book value and share price has widened.

The next thing I look for from a value company is if they pay a dividend. When looking for value, sometimes it will take an extended period of time for the investment to work out, so I want to be paid for locking my capital up. This isn’t a must, but it certainly is an advantage. Citigroup has the third largest yield of the group at 5.12%, with a 37.06% payout ratio. This is interesting as Citigroup is paying roughly the same amount I can get from a risk-free asset. Their payout ratio indicates that there is significant room for dividend increases, and Citigroup has recently increased the quarterly dividend from $0.51 to $0.53.

Just because a company trades below its book value, pays a dividend, and looks be trading near an established long-term support level, I still need to see that there is earnings growth on the horizon. If earnings aren’t growing, then the company could be considered dead money, and the chances of missing earnings estimates could increase. I want to invest in companies that look to be undervalued and have projected earnings growth on the horizon, in addition to paying a cheap multiple on those earnings.

Citigroup, Verizon, Altria, and PayPal are all trading at a single-digit P/E for their projected 2024 and 2025 earnings. All five companies look attractive, and that’s probably why I am invested in four of them. PYPL trades at just 8.7x 2025 earnings and is projected to increase its EPS by 29.49% from the end of 2023 thru 2025. While all of the companies are attractive, I feel Citigroup takes the cake here, as its P/E is 7.24x 2023 earnings and drops to 5.99x for 2025 earnings while providing 20.98% in EPS growth from the end of 2023 thru 2025. This is astonishing as shares are priced as if EPS will drastically decline.

Lately, I am looking at their profitability and whether a company is buying back shares. While all of the businesses are different, I want to see that their bottom line is strong and that they have been rewarding shareholders with a portion of the profits being allocated toward buybacks. All five of these companies are extremely successful with strong profit margins. For me, Cisco looks the most interesting in these metrics as they have a 22.13% profit margin, exceeds $10 billion in net income, and have repurchased 20.38% of its shares since 2013. Citigroup is also strong, with an 11.08% profit margin and $13.58 billion in net income, and it has repurchased 7.41% of its shares since 2013.

After looking at the data, this is how I concluded that Citigroup was my top value idea

I want to be clear on this point. I feel that of the companies I looked at, PayPal has the highest probability of generating the largest amount of alpha over the next several years, and of these companies, PayPal is my largest holding. However, this doesn’t make PayPal my top-value idea. As I indicated earlier, when I look for a value play, I am looking for a company that is deeply discounted from what I believe their current fair value is, not where it could possibly appreciate to.

Citigroup would be my champion as it currently trades at a -58.27% discount to current book value, and would need to more than double just to trade at a baseline 1:1 valuation with its book value. Citigroup trades at a 7.24 P/E on 2023 earnings, and this drops to a 5.99 P/E based on 2025 earnings projections. Citigroup also has 20.98% of potential earnings growth on the horizon. Citigroup also pays a 5.12% dividend by only allocating 37.06% of its earnings toward the dividend. These are the main reasons I feel Citigroup is a stronger value idea than the other companies. I am getting paid to wait and starting out at a deep discount to book. PayPal also hasn’t established a bottom, while Citigroup continues to bounce off of long-term support. Citigroup continues to buy back shares and increase each share’s equity while decreasing the number of shares its earnings and dividends are split across. For me, Citigroup represents deep value, and from the companies I looked at in value ETFs and companies that I consider value companies, Citigroup is the most enticing for me from a value investing perspective.

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Source: seekingalpha.com