Many Strong Reasons To Consider Citigroup
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In mid June, Citigroup (NYSE: C) will be celebrating its 200th birthday. While there is nothing much to celebrate there is a lot to expect from the future. The company stock is currently significantly undervalued, pays a token dividend, and its CEO has been the casualty of the new law allowing shareholders to disapprove executive pay. I believe there are a number of catalysts that will help the stock recover some of its lost value in the next twelve months. First, Citigroup is a leader in electronic wallet and I believe this will have much larger growth in the future than other traditional bank services. Second, the company derives a large portion of its revenues from emerging markets which I expect to have a faster economic growth than developed ones. Finally, Citigroup should increase its nominal dividend by the end of 2012 which will lower the share volatility and reward current shareholders. All this is helped by Citigroup's ability to market its services in innovative ways.
Citigroup together with JP Morgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), and Bank of America (NYSE: BAC) comprise the big four banking institutions in the U.S. Out of the big four Citigroup's shares appear the most undervalued on a number of metrics. For example, its forward price to earnings ratio is 6, compared to 7 for JP Morgan, 9 for Wells Fargo, and 11 for Bank of America. It appears that being headquartered in New York is not healthy for a bank's valuation. On a price to book value basis, Citigroup again lags with a price to book value (tangible) of 0.5 compared to 1 for JP Morgan, 1.7 for Wells Fargo, and 0.5 for Bank of America. In my opinion, this is due mostly to the Federal Reserve test that Citigroup failed. Indeed, from March 13, 2012 through May 1, 2012 shares of Citigroup have declined by about 7.8%. For the same period, JP Morgan stock was up by 1%, Wells Fargo was up 2.3%, and Bank of America was down 2.2%. For comparison, the S&P 500 index was up about 0.5% during this period. It is interesting to note while Citigroup failed the Federal Reserve test, it was JP Morgan who reported a surprising loss of over $3 billion due to poor oversight. I guesstimate that Citigroup will pass the Federal Reserve test in the summer and the bank will increase its dividend and start a share repurchase program at that time.
One of the reasons for Citigroup shares to rebound is that the company has a leadership position in electronic wallet and is a leader in innovative technologies. I think mobile payments will become more popular in the future as demand for some of the traditional banking services continues to erode. Recently, Citigroup invested in electronic verification firm Jumio. I view this as a strategic investment as Citigroup is also placing one of its officers on the board of directors of Jumio. In addition, Citigroup is also investing in another e-payment company, shopkick. The major product of shopkick allows smartphone users to receive rewards (called kicks) simply by entering a participating retail store. Citigroup's interest in new payment technologies is further highlighted by the fact that the company is a founding partner of Google Wallet.
The future of electronic payments is uncertain. There are many companies trying to disrupt the usual way of payment. One of these companies is Nokia, which established the near field communications standards in 2004. Unfortunately, Nokia is currently fighting for its own survival. In my opinion, Citigroup's investment in this area can bring only benefits to the company as Citigroup is a leader already in credit cards. The company had $151.5 billion of credit card loan portfolios as of December 31, 2011 which is the largest amount among bank holding companies, according to the American Banker.
Citigroup is a leader in new technologies as well as in promoting its brand in innovative ways. It was reported recently that the company paid $41 million to have its logo for five years on the bikes that will be used in the new New York City bike-sharing program. The program is called Citi Bike. In addition, Citigroup is using social media aggressively to promote its brand. This is evident in the company's initiative with LinkedIn to create the professional women's network and offer financial advice and career advancement to women.
Another reason I think Citigroup's shares will advance in the short-term is that the company has exposure to faster growing emerging markets. For example, Citigroup formed a joint venture with Orient Securities of China which is called Citi Orient. This will give Citigroup exposure to one of the largest capital markets in the world outside of the U.S. In addition, Citigroup's Chinese subsidiary received approval earlier this year to offer Citigroup credit cards. This will be the first U.S. based bank to issue its own credit cards in China. Citigroup's expansion is not focused entirely on China. The company's Philippine subsidiary entered recently into a partnership with Planet Payment. This will allow Citigroup's customers who travel to the Philippines to pay in their native currencies. The bigger picture in emerging markets is even more revealing. Citigroup's revenues in Latin America and Asia experienced the highest growth in 2011 compared to North America and Europe. Also, Asia and Latin America contributed over half of the company's 2011 net income of $11 billion.
I do not expect the Met's, who play on Citi Field in Queens, to become world champions this year. However, there are plenty of other tailwinds for Citigroup as the company turns 200 years. Electronic payments and emerging markets are few major catalysts which I believe will help Citigroup's stock to recover some of its lost ground. A passing grade on the Federal Reserve banking test in the summer will provide additional dry powder as it will allow the bank to increase its dividend payout and repurchase shares.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company, short OCT 2012 $33.00 puts on Wells Fargo & Company, and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.