Citigroup is a multinational banking giant which was created with the merge of Citibank and Travelers Insurance in 1998. It is one of those four banks in the USA which are called 'too big to fail'. In 2008 financial crisis the government approved a bailout package for the company to prevent its further loss of value. Nowadays Citigroup provides services in all major banking segments for about 200 million clients in more than 160 countries.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Revenue | 97120 | 103449 | 88839 | 79865 | 101078 |
| Equity | 196220 | 193242 | 199442 | 201972 | 201189 |
| ROE | 9,09% | 9,98% | 5,51% | 10,79% | 7,43% |
| Dividend | 1,54 | 1,92 | 2,04 | 2,04 | 2,12 |
| Dividend yield | 2,97% | 2,40% | 3,35% | 3,37% | 5,15% |
Althought the revenue is fluctuating from one year to another, it has always remained as high as 80-100 B USD with a stable shareholder equity. As for its return on equity ratio, the company has had some tough years but 9%-10% levels are achievable. Therefore our calculation is based on the average 8,5%. Dividends had increased and peaked in the last three years while the dividend yield has reached 5,14% in 2022 due to a drop in share price.
At banks and financial institutions loan capital is fuel for the business, so we evaluate shareholders equity, return of equity, growth of the equity and the cost of equity. Free cash form equity is discounted by the cost of equity.
Our calculation is based on the yield of an American 10-year treasury bond (4,22%) as a risk free return and the average equity risk premium (4,4%) in the US market during the last 80 years. Getting 11,12% for the cost of equity we’ve calculated with the 8,56% average return of equity. We expect that net income will grow by 2% per annum on long term.
This analysis helps us estimate shareholder’s equity and net income in the next 5 years. All profit that was not payed out as dividend remains at the company to increase the shareholder equity in the following year. By deducting the cost of equity from the extra cash generation we get the additional cash flow which is the basis of our calculation.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023E | 2024E | 2025E | 2026E | 2027E | TV | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Income | 17853 | 19284 | 10994 | 21791 | 14963 | 18081 | 19127 | 20233 | 21403 | 22641 | 23094 |
| Cost of Equity | 22388 | 23497 | 24855 | 26293 | 27813 | 29422 | |||||
| Excess Return | -5415 | -5728 | -6060 | -6410 | -6781 | 48141 | |||||
| PV | -4650 | -4639 | -4415 | -4203 | -4001 | 31840 | |||||
| Value of Company | 210897 | ||||||||||
| Fair share price | 108,7 |
At the time of the analysis we got 210,9 B USD for the value of the company, which is 108,7 USD /share. Using a safety margin, our proposed price is 71,74 USD which is higher than the current share price (41,46 USD). At this price level our offer is: buy.
According to current share prices and other data:
| Stock | Price | Shouts | NI | P/E | BV | P/BV | Revenue | P/Sales |
|---|---|---|---|---|---|---|---|---|
| USB | 35,51 | 1530 | 5440 | 9,987188 | 40545 | 1,34 | 24254,6 | 2,24 |
| WFC | 41,23 | 3700 | 15070 | 10,12283 | 149559,8 | 1,02 | 71958,02 | 2,12 |
| BAC | 28,5 | 8040 | 28240 | 8,114023 | 233816,3 | 0,98 | 90212,6 | 2,54 |
| JPM | 147,05 | 2940 | 46060 | 9,38617 | 271903,8 | 1,59 | 137246,7 | 3,15 |
| BK | 43,73 | 803,34 | 2760 | 12,72828 | 35847 | 0,98 | 15968,21 | 2,2 |
| C | 41,46 | 1940 | 14963 | 5,375419 | 171132,8 | 0,47 | 69338,28 | 1,16 |
| Average | 10,0677 | 1,182 | 2,45 | |||||
| Pe= | 77,65101 | 104,2675 | 87,56638 |
Using averages, the value of Citigroup shares are around 78-104 USD, while FCFE analysis shows 108,7 USD. All these results mean that Citigroup shares are significantly undervalued at the price of 41,46 USD.
Based the valuations above Citigroup's shareholder’s equity is stable, however its revenue is fluctuating. Its dividend has not been increased further, the current dividend yield is 5,14%.
The ROE (8,56%) is lower than the cost of equity (11,12%) meaning that it doesn’t create any additional value. If ROE could go above 12%, the company would grow again and this may lead to further dividend increase.
According to the FCFE analysis, the fair price is 108,7 USD/share. Using margin of safety our target price is 71,74 USD. This price is confirmed by the competitor analysis, the company is undervalued compared to its competitors. The actual price is less than our proposed price, so our proposal is: buy.
