Citigroup Inc (C): Speculative Megabank Or Future Dividend Growth Machine?

Dividend Growth Analysis

Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Citigroup’s Dividend Growth Score is 55, which indicates that the company’s dividend growth potential is about average. Of course that’s almost entirely due to the disastrous effects of the financial crisis, in which dividend payouts went from $21.6 per share in 2007 to $0 in 2010. Until the crash, Citigroup’s shareholders enjoyed superb dividend growth from what appeared to be a blue chip stock:

With Citigroup’s payout ratio still at an extremely low level, the Federal Reserve likely to raise rates in December, the bank’s balance sheet at record strong levels, and a buyback program that could reduce share count (and dividend cost) by 5% or so in 2017, Citigroup seems poised for another nice dividend increase in the next year or two.

In fact, over the next decade, it wouldn’t seem out of reach for Citigroup to compound its dividend at a double-digit annual rate. The company may never join the list of Dividend Aristocrats, but it could still reward shareholders with strong income growth.

Of course, never forget that despite the impressive dividend growth potential this bank possesses, that’s only because the dividend is rising from a very low base of 4 cents per share.

In other words, the dividend growth and capital gain potential is a direct result to the tragic mistakes of the previous management that brought a $600 stock to $1 in three short years due to a complete failure of risk management and the need to recapitalize the bank through massive shareholder dilution.

Valuation

When it comes to bank valuation, the price to tangible book value ratio is the gold standard because it compares the share price to the objective intrinsic value of the bank.

It also serves as a useful tool for comparing the quality of bank with its peers. For example, from the table below you can see that not only is Citigroup currently trading at a 21% discount to its tangible book value per share (liquidation value), but it’s also one of the most undervalued global banks on relative basis and far below what it has historically traded at.

Source: Gurufocus

This massive discount is the market’s way of telling investors that Citigroup is the lowest quality (i.e. most speculative) big bank. For example, Wells Fargo, which, over its 164 year history has survived a number of depressions, banking crises, recessions, and world wars, is seen as a rock solid bank that cannot just survive any crisis the world throws at it, but still turn a profit.

In other words, the market is willing to pay a substantial premium for Wells Fargo because of the confidence that, even with the current scandal rocking the bank, the company will continue to generate solid profits and dividends for shareholders over many years to come.

Of course, the better Citigroup’s turnaround goes and the longer management can continue to grow both the strength of the balance sheet and tangible book value per share despite the brutal banking conditions of today, the greater the chance that this discount will decrease. This is why Citigroup might offer the best potential for capital gains of any of America’s megabanks.

Turnarounds are often hairy and can take many years of time to regain the trust of investors. For that reason, they can sometimes deliver exceptional returns. However, there is always the risk that things don’t turnaround or get worse.

While this seems unlikely given the new capital requirements and risk-reducing regulations facing the banks, Citigroup’s marred history and opaque balance sheet will not be forgotten anytime soon.