Do you look forward to getting dividend payments? I would hope the answer is a resounding "yes."
Given that, we can only imagine the feeling that star investor Warren Buffett gets when payout time swings around. After all, his investment vehicle Berkshire Hathaway stands to collect over $6.1 billion in dividends this year from its equity portfolio.
That's a big chunk of change. And the No. 1 Buffett dividend in terms of yield is... well, it might not be exactly what you'd expect. Let's uncover it and see if it's a worthwhile investment these days.
A high-yield dividend, believe it or not
Can I get a drum roll? The top stock in terms of dividend yield for Berkshire right now is none other than Citigroup (C 0.41%), with a payout that currently sits just under 5%.
That might be surprising, as the U.S. banking sector -- despite the rivers of money flowing through the system -- hasn't always been generous with dividends. But times are frothy for the industry just now, with a resilient economy and relatively high interest rates helping to power the fundamentals higher. Why not share some of those gains with investors?
Alas, Citigroup is a company looking from the outside in at the party. The rest of this country's Big Four banks -- JPMorgan Chase, Bank of America, and even scandal-prone Wells Fargo -- lately have seen healthy gains in core metrics like revenue, profitability, and loans. This hasn't been the case for Citigroup.
NYSE: C
Key Data Points
Take the bank's most recent set of results from its second quarter. Total revenue actually sank, dipping by 1% year over year to a bit over $19.4 billion. Operating expenses were up by 9%, which is one reason why headline net income fell a queasy 36% to slightly more than $2.9 billion. Total loans inched up by only 1%, and deposits declined marginally.
What's going sideways for Citigroup in such an ostensibly favorable environment? A major factor dragging its results is size and sprawl. It has a presence abroad in a host of markets where it operates networks of traditional brick-and-mortar banks. Some of those economies aren't particularly hot, and operating branches is resource-intensive -- especially in this day and age of online/mobile banking.
One of the pillars of the bank's strategy since naming Jane Fraser its CEO in 2021 is to slim down and consolidate operations. But that's easier said than done in such a bulky company. It can also be tougher to unload an asset than to purchase one, as Citigroup found out with its attempt to find a buyer for the lender it owns in Mexico, Banamex. That business will likely hit the market as an initial public offering (IPO) at some point, instead.
It's cheap, but is it a buy?
Yet Buffett knows an undervalued asset when he sees one, and some of Citigroup's valuations stand out for how low they are. Its trailing price-to-earnings ratio (P/E) stands at under 6.5, notably below that of Bank of America (7.9), JPMorgan Chase (9.4) and Wells Fargo (10.3). Its price-to-book, always a good yardstick for banks, also stands out -- it's near the floor at 0.4 these days, versus a respective 0.9, 1.5, and 0.9 for the three peers.
As the old boilerplate warning goes, past performance is not indicative of future results, but Citigroup sure is priced that way by the market. If its transformation into a more streamlined operation is successful, the lender's fundamentals stand to improve dramatically -- and those valuations are sure to rise, even precipitously. Its share price will follow, no doubt.
The company doesn't deserve that undervaluation and looks like a bargain. The big caveat, of course, is the company's restructuring and consolidation program. It won't go fast no matter what, given Citigroup's size and complexity, and there's no guarantee it'll be successful.
Ultimately, while I think investors are getting a good deal at Citigroup's current share price and (especially) its dividend yield, I wouldn't say it's a sure thing. I'd recommend it as a play for investors with an above-average tolerance for risk -- and the patience for what may become a long turnaround story.
