What happened
After a serious slump this year, shares of Citigroup (C 2.02%) rose by nearly 11% in May, according to data provided by S&P Global Market Intelligence. The stock price moved higher after Warren Buffett's conglomerate Berkshire Hathaway revealed that it had taken a position in the embattled bank during the first quarter.
So what
Berkshire Hathaway's most recent 13F report came out in May, detailing what stocks Buffett and his investing team purchased in the first three months of 2022. The disclosure showed that they had purchased 55.2 million shares of Citigroup for a total value of roughly $2.95 billion. The average cost per share was about $53.40.
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Berkshire Hathaway was able to scoop up those shares at a significant discount to the bank's tangible book value, making it look like the typical kind of value play that normally appeals to Buffett. At its current share price, Citigroup's dividend also offers an attractive annual yield of roughly 3.9% -- and we know Buffett loves dividends.
But Citigroup has traded at a discount to its tangible book value on numerous occasions over the last decade, so the fact that Buffett and Berkshire Hathaway have jumped in this time could suggest that the bank may finally be on the right track.
CEO Jane Fraser took over the bank a little more than a year ago and has embarked on a big transformation plan that is likely going to take several years. Already, Fraser is in the process of selling 13 international consumer banking units and also announced that Citigroup plans to sell its profitable Mexican consumer banking operation as well. The plan is to simplify the bank and invest in divisions that are already generating good returns.
At its investor day, Citigroup said it is targeting an 11% to 12% return on tangible common equity in the medium term. That would still lag behind its peers, but would be a step in the right direction.
Now what
Citigroup's transformation is by no means going to be easy, and after years of lagging returns, shareholders are restless. Its expenses will also be higher in the near term as Citigroup attends to regulatory matters that have been ignored for too long.
But the bank finally seems to be making the hard choices to put it on track to become a much stronger and more sustainable operation in the long term. It seems like Buffett and Berkshire have seen this, too. That's a good sign for Citigroup's frustrated shareholders.
