Citigroup (C 0.06%) is a name that most people know, given that the company's bank branches are scattered liberally across the United States. It also has a storied history, but that tale hasn't always been positive. While Citigroup is in pretty solid shape today as a business, does that make it worth buying now?
What does Citigroup do?
The part of Citigroup that most people probably know best is its consumer and business banking. These are the simple bank branches you see all around the country.
They offer banking basics, like savings and checking accounts, and loans (including mortgages). It is the core of Citigroup, and most other banks.
Image source: Getty Images.
On top of that, it also operates in wealth management, markets, services, and investment banking. Without getting into the details, it helps companies and wealthy people manage their money.
These are all far more complex businesses than basic banking, which is a near necessity in a modern society. Basic banking, which accounts for around a quarter of the company's revenue, tends to be a fairly boring and reliable business, with the other lines offering higher profits and higher volatility.
The big takeaway is that if you invest in Citigroup, you aren't buying a simple bank. You are buying a simple bank with a diversified and complex business layered on top of it. It is a financial giant. But you probably want to make sure you are being paid well for the extra risk here.
Citigroup has let investors down before
Here's the problem: Citigroup's dividend yield is relatively attractive at around 2.8%. That compares very favorably to the S&P 500's average of 1.2% and is slightly above the average bank's 2.5%. So investors looking for yield might find it of interest.
The trouble with an investment here is that Citigroup's complexity has become a problem in the past. Most notably, it got caught up in the housing crisis between 2007 and 2009, and ended up cutting its dividend and taking a government bailout.
That wasn't the first time that its complexity got the better of it, either, as the bank was entangled with Enron, an infamous corporate implosion. Essentially, Citigroup has taken on risks that ended up costing investors dearly many times in the past. Is 30 more basis points of yield versus the average bank worth the risk that it overreaches again?
That brings up value. While Citigroup is offering a slightly above average yield today, that doesn't mean the stock is attractively priced. For example, the price-to-earnings and price-to-book value ratios are both above their five-year averages right now.
That hints that the stock is actually on the expensive side. That's true even though it is down more than 80% from its highs prior to the 2007-2009 Great Recession (the dividend, notably, is also nowhere near its pre-cut levels).
Citigroup is better positioned today, but is it worth buying?
At the end of the day, the bank is a bit of a mixed bag. It is a complex business that looks a little expensive. It is offering a relatively attractive yield and is actually in much better shape today than it was when it had to accept a government bailout nearly two decades ago.
But you can probably still do better if you take the time to examine other options, like Toronto-Dominion Bank (TD -0.65%) or the Bank of Nova Scotia (BNS -0.19%).
These two Canadian banks have yields of 4.2% and 5.8%, respectively. They have entrenched industry positions in their home market and tend to operate in a conservative manner. And neither one cut its dividend in the deep 2007-2009 recession.
There are risks to consider with both TD Bank and Scotiabank, of course, but you are being paid well via their lofty dividend yields to take on those risks -- much better, as it were, than what you will be paid to own Citigroup.
