Wealthy investor Stanley Druckenmiller is currently purchasing a high-income stock favored by Warren Buffett, which appears to be a bargain at present.
Diving into the world of finance and investment, it's always beneficial to learn from the giants of the industry. One such figure is Stanley Druckenmiller, the mastermind who managed Duquesne Capital to an average annual return of 30% for three decades before shuttering it in 2010. Although Druckenmiller now oversees a family office, his strategies are still worth considering.
The Securities and Exchange Commission (SEC) disclosures show that in the third quarter of 2024, Druckenmiller expanded his portfolio with a new position in Citigroup (C 1.88%). Joining him in his affection for Citigroup is fellow billionaire Warren Buffett, whose Berkshire Hathaway held over 55 million shares at the end of September.
Retail investors can gain valuable insights from observing successful fund managers, but it's essential to remember that not every investment will yield the desired results. Let's explore what attracts billionaires to this dividend-paying bank and whether it might be a good fit for your own portfolio.
Unseen Value?
Over the past decade, Citigroup stock has lagged peers Bank of America and JPMorgan Chase. This underperformance has resulted in a strikingly low valuation of just 0.9 times its tangible book value. Essentially, you can procure $1 worth of the bank's assets, minus liabilities, for $0.90 at current prices.
While a low book value might hint at an investment opportunity, it's not a guarantee of success. Banks like Citigroup must demonstrate the ability to efficiently convert their equity into profits. A subpar return on equity (ROE) in recent years might explain why investors remain skeptical of Citigroup's stock.
Many attribute Citigroup's lackluster performance to the inefficiencies of its sprawling organizational structure. However, recent efforts to pare down underperforming international operations and cut costs are starting to show results in quarterly earnings reports.
In Q4 2024, Citigroup reported earnings of $1.34 per share, surpassing analyst expectations by $0.10. The bank also announced a $2.1 billion distribution to shareholders in the form of dividends and share buybacks.
In addition to its $2.8% dividend yield – higher than the average S&P 500 stock – Citigroup has indicated a plan to repurchase $20 billion worth of its stock over the next several years.
Revitalized Citigroup
Citigroup's current CEO, Jane Fraser, took the reins in 2021 with a mandate for modernization and simplification. This transformation began with the November 2024 separation of its institutional banking business in Mexico from Banamex, consisting of consumer, small-market, and middle-market enterprises.
This separation marks a significant step towards a potential IPO of Banamex, although the timeline has yet to be set. Prospects are promising, though, as Citigroup shareholders stand to gain new Banamex shares within the next few years.
Fraser's revitalization plan sees Citigroup exit consumer banking operations in 14 nations worldwide: nine of which have already been sold off, with sales process ongoing in Poland, and closure of consumer-focused operations in China, South Korea, and Russia in the works.
Worth the Investment?
Citigroup announces a significant share reduction plan and plans to boost its already substantial payouts to investors over the next few years. The company's $5.94 per share net income in 2024 surpasses its annualized dividend obligation, paving the way for future increases.
Fraser's modernization efforts have produced significant gains, with Citigroup reporting a 2.1% year-over-year increase in its return on tangible common equity, reaching 7%. This trajectory is poised to continue, with projections of the metric reaching a range of 10-11% before 2026.
Dividend-focused investors might hesitate to invest in Citigroup due to its yield of less than 3%. However, considering the profitability trends, sidestepping Citigroup because of a mere lack of dividend could prove to be an investment blunder. Its likely increase in profits and repurchases make it an intriguing choice for diversified investors.
Despite Citigroup's present underperformance compared to competitors, its attractive valuation and promising outlook make it an interesting addition to many investment portfolios. Investors seeking value and steady dividends should consider adding Citigroup shares to their portfolios, keeping a close eye on the company's progress to remain informed.
Given the SEC disclosures and the strategies of successful investors like Stanley Druckenmiller and Warren Buffett, some retail investors might be interested in considering Citigroup as an investment opportunity. Despite its past underperformance, the bank's current valuation of just 0.9 times its tangible book value and promising modernization efforts under CEO Jane Fraser make it an intriguing prospect for dividend-focused investors seeking value and steady returns.