Earlier this month, Warren Buffett and his company, Berkshire Hathaway, disclosed what stocks they held at the end of the fourth quarter of 2024 in the company's 13F filing. Investors eagerly await this filing to see what moves the Oracle of Omaha and his team of investing lieutenants made each quarter. In 2024, Berkshire sold many more stocks than it purchased, signaling they view the market as overvalued and aren't seeing many opportunities.
However, one of the company's moves in the fourth quarter caught me off guard: Berkshire dumped 73% of its stake in Citigroup (C 0.32%), previously a top-20 position in Berkshire's portfolio. Citigroup has done significant work to improve the company in recent years, the stock is still cheap, and has a healthy dividend yield or roughly 3%. Did Buffett make a mistake?
Buying value cheap and selling it cheap
Buffett and the Berkshire team have long been buyers of bank stocks. In fact, you'd be hard-pressed to find a major Wall Street bank stock that Berkshire hasn't owned in the 21st century. However, Buffett began to sour on the industry following the onset of the pandemic, when he sold many of his large bank holdings. Berkshire has also been selling major chunks of its stake in Bank of America, a trend that continued in the fourth quarter.
When Berkshire launched a new stake in Citigroup in the first quarter of 2022, I thought Buffett and Berkshire might be in it for the long haul. After all, Citigroup traded at a significant discount and had embarked on a promising transformation. Furthermore, Buffett had rarely owned Citigroup in the 21st century and had sold many other large bank stocks, so I assumed this time was different. But then Berkshire dumped 73% of its stake in Citigroup in the fourth quarter.
Based on Berkshire's 13F filing for the first quarter of 2022, when Berkshire purchased almost all of its position, the company purchased over 55.1 million shares at an average cost of about $53.40. Citigroup's tangible book value (TBV) per share at the time was about $79, meaning Berkshire bought Citigroup for about 68% of its tangible book value (TBV), or theoretical liquidation value. Banks often trade relative to their TBV, so a growing TBV often can translate into a higher share price.
We don't know when exactly Berkshire sold Citigroup in the fourth quarter, but the company's average stock price throughout the quarter was $67.32, implying close to 27% upside on the shares Berkshire sold. Assuming the average share price in the fourth quarter, that means Berkshire sold shares at about 75% of TBV. Assuming Berkshire owned these Citigroup shares for 2.75 years, that comes out to an average annual return of about 9.8%, pretty in line with long-term annual returns of the broader market.
Buffett and Berkshire seem to have made a short-term decision here. For one, the stock has increased significantly since President Donald Trump triumphed in the November election. It also is still quite cheap compared to peers.
C Price to Tangible Book Value data by YCharts
An odd move for a long-term value investor
Since the Great Recession, Citigroup has disappointed investors with lackluster returns and transformations that have not worked or taken too long. However, when Jane Fraser took over as CEO in 2021, she moved quickly.
Fraser immediately chose to divest 14 of the bank's international consumer banking divisions, which were a drag on capital and didn't have the scale to compete. Fraser also made the difficult decision to ditch the company's strong-performing consumer banking business in Mexico. While that process has taken longer than expected, Citigroup is planning an initial public offering for the division potentially as soon as this year.
These moves will free up capital, allowing the bank to modernize its operations, invest in high-performing businesses, and repurchase stock while the bank trades below TBV, which effectively helps grow TBV. Since Berkshire purchased Citigroup in the first quarter of 2022, the bank has grown TBV about 13% to $89.34.
Additionally, Trump's victory should be bullish for bank stocks, which should see deregulation. For the large banks, the most obvious outcome would be lower regulatory capital requirements, which would give Citigroup more capital to repurchase stock.
Buffett and Berkshire were sounding the alarm on the stock market and maybe even the economy all throughout 2024. Berkshire has sold many more stocks than it's purchased and hoarded cash, so perhaps the team sees a significant correction or recession on the horizon. History shows that Buffett has a knack for timing downturns correctly. Banks are cyclical, so a recession could challenge their stocks.
That said, Buffett and Berkshire frequently preach a long-term investing horizon. It's hard for me to see how Citigroup has become a worse investment now than it was in 2022. Management has simplified the bank and freed up capital and still trades at a significant discount to peers. If Citigroup trades at half the valuation of JPMorgan Chase, that would be a massive win for shareholders, which is why I feel Buffett and Berkshire sold too early.
