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A 4.4%-Yielding Big Bank Stock With an Irresistible Discount

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For decades, Warren Buffett has been an avid owner of American bank stocks.

But he’s never owned a significant stake in Citigroup Inc. (NYSE: C).

Why, then, is the Oracle of Omaha now greedily buying up shares of the company?

The answer is Citigroup’s cheap stock market valuation.

Like the shares of almost every company lying outside the energy sector, Citigroup shares are down big in 2022.

Year to date, the stock has declined by about 25%.

Somehow Citigroup shares are now back down to where they were in April 2020, when economies around the world were closed in the face of the COVID-19 pandemic.

Chart: Citigroup Share Price

While everything isn’t exactly sunshine and rainbows today, I can tell you with certainty that the challenges facing Citigroup today are nothing close to what the company confronted in April 2020.

I can’t believe this stock, which was at $80 just last year, is now back down to levels on par with the market bottoms of COVID-19.

Normally, an excellent entry price for a bank is at or above book value.

Today, Citigroup trades at just 0.5 times book value, or $0.50 for each dollar of the bank’s net assets.

Chart: Citigroup's Price-to-Book Value

That’s a rock-bottom valuation.

I’m sure this valuation, combined with Citigroup’s juicy 4.4% dividend yield, is what has attracted Mr. Buffett.

In the first quarter of 2022, Buffett’s Berkshire Hathaway (NYSE: BRK-A) purchased almost $3 billion worth of Citigroup shares.

Buffett now owns 2.5% of Citigroup.

For further perspective, consider that Citigroup trades at roughly half the book value of other big American banks, like Wells Fargo (NYSE: WFC).

Chart: Citigroup Versus Peers on Price-to-Book Value

Citigroup shares would have to double just to trade in line with the other banks.

Regarding 2022 earnings, Citigroup also looks cheap relative to its peers. While the group trades for roughly 10 times earnings on average, Citigroup trades for under seven times earnings.

Chart: Citigroup Versus Peers on Price-to-Earnings Ratios

To be clear, I don’t think Citigroup is the best-run banking business in the world. It could be more efficient and profitable.

But I actually view Citigroup’s current weaknesses as opportunities for management to drive earnings growth in the years ahead.

There’s low-hanging fruit that can be picked here to improve profitability.

And at 0.5 times book value and less than seven times earnings, Citigroup is trading like we’re in the midst of a financial crisis, which we are not.

There’s a lot going in Citigroup’s favor. Its balance sheet is strong. Its stable dividend is a juicy 4.4%. Even better, the downside risk for buying Citigroup shares is virtually nonexistent because the tough stock market has pushed Citigroup’s share price to a level where the downside risk is muted and the upside opportunity is significant.

In the wake of the worst start for the S&P 500 in 50 years, Citigroup shares are currently extremely undervalued.

Valuation Rating: Extremely Undervalued

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Good investing,

Jody

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