Citigroup's Shares Will Fall on Thursday -- Investors Should Look at Them Now

U.S. stocks could not sustain the morning's gains on Wednesday, as the benchmark S&P 500 ended the session with an 0.7% loss. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell 0.6%. Shares of Citigroup (NYSE: C  ) managed to outperform the broad market today, but that won't be the case tomorrow, as the Federal Reserve announced after the market close that it has rejected the bank's capital return program, along with that of four other institutions (three subsidiaries of foreign banks and Zions Bancorporation). Shares of Citigroup fell 5.2% in after-hours trading, but while traders may be selling the stock, it's providing an opportunity for patient investors to take a closer look at them.

The rejection of Citigroup's capital return program did come as a bit of nasty surprise to the market, as the Fed announced last week that it had passed its annual "stress test," which looks at major banks' capital adequacy under adverse economic scenarios (this was not the case of Zions -- the only institution among the 30 being examined that failed to meet the Fed's requirements.)

If you're a trader, perhaps this is sufficient reason to sell the shares, but for a long-term, fundamentally oriented investor, I don't think it does much to alter the reasons for owning the stock. The likely outcome is that the dividend increase and share repurchases that investors were expecting this year will be approved a year from now. Is the difference worth a 5% haircut in the stock's value? Perhaps, but that looks like an upper bound -- combine a "normal" bank dividend and buyback yield, and you might just about get to 5%.

(Naturally, there may be other considerations; for example: Is Citigroup's common equity riskier than investors had thought before the Fed's announcement? My reply to that objection is that last week's result -- a pass on capital adequacy -- is more relevant in that regard.)

Besides, as of today's closing prices -- that is, before any price decline that may occur on Thursday -- Citi's shares already look reasonably compelling, trading at a 9% discount to their tangible book value and just 10.4 times next twelve months' earnings-per-share estimate. The latter multiple represents roughly a one-third discount to the S&P 500's forward earnings multiple, which stands at 16. Whether or not Citi's shares are significantly undervalued on an absolute basis (i.e., relative to their intrinsic value) may be a matter of legitimate debate (I happen to think they are), but that they represent better value than the broad market looks incontrovertible. In a market that looks a bit overheated, with fewer and fewer clear values, that alone makes Citigroup's shares worth a second look.

Banking: The biggest change you never saw coming (it's investable!)
Do you hate your bank? If you're like most Americans, probably so. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the traditional bricks-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under Wall Street's radar. To learn about about this company, click here to access our new special free report.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2892259, ~/Articles/ArticleHandler.aspx, 8/28/2015 5:31:58 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

Today's Market

updated 8 hours ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 4:35 PM
^DJI $16654.77 Up +369.26 +2.27%
C $53.44 Up +1.16 +2.22%
Citigroup Inc CAPS Rating: ***