In December, I picked Citigroup Inc (NYSE:C) as my best stock to buy for 2017. I stood behind my selection then and, today, I see no reason to move in any other direction. One sign of good things to come, C stock — the bank’s provider of commercial and consumer banking products and services — raised its base lending rate to 4.25% from 4% last month.
Back in April, I mentioned that I liked Citigroup because it’s probably one of the most undervalued bank stocks and, therefore, it has the best chance to appreciate from current levels. Its total assets are very large compared to its market price, and its price-to-book value back then was around 0.80. Now, the price-to-book value is around 0.89. C stock has performed well since the positive results of the Federal Reserve’s stress tests, which is a welcomed surprise with a price now in the range of $68.
In my last update, I noted that when you look at Citi’s stock chart, the shares were in the process of consolidating. I predicted C stock was going to make another big move — probably towards $65 — by the end of 2017. And right now, Citigroup is trending in the direction I thought it would.
While the momentum C is gaining is great to see, the best part is that there is still room for improvement. Citigroup’s recent rise has not been generated as a result of a fundamental shift in terms of gaining new customers by organizing better business opportunities.
Instead, the rise is due to the Federal Reserve allowing the company and 33 other big banks in the U.S. to release more of their capital to their shareholders after passing the stress tests. These stress tests are conducted by the Fed to establish supervisory objectives from lessons learned during the economic recession between 2007 and 2009.
The Fed monitors whether or not financial firms with $50 billion or more in consolidated assets are equipped to take on losses during bad economic conditions while meeting their tasks to be able to lend to businesses and households.
So, while I don’t put a lot of emphasis on the merits of the stress test, it’s good to see the bullish action from Citi’s stock. I’m also pleased to see that C doubled its dividend payout from 16 cents to 32 cents while announcing a buyback program of $15.6 billion on June 29, which is the largest in the company’s history.
These capital actions are scheduled to take place during the next four quarters and will total in $18.9 billion starting with the third quarter in July.