There are two major events affecting big banks, one in the past and one in the future. The first event involves a ruling by the U.S. Federal Reserve that’s problematic for large banks like Citigroup (NYSE:C). The other event is an upcoming earnings report that could push C stock higher, lower or sideways.
Skittish traders might choose to avoid C stock completely due to either one of these events or perhaps both of them. That’s a shame because the stock is a real bargain right now.
It’s also a premier dividend payer. That’s a positive sign during a time when the novel coronavirus caused some businesses to eliminate their dividend payouts completely.
Besides, expectations are basically rock-bottom for Citigroup as the earnings day approaches.
True contrarians should know that C stock is a textbook example of “buying on fear.” This is true even if it’s the Federal Reserve that’s creating the fear.
A Closer Look at C Stock
Because of the financial impact of the coronavirus, many businesses have chosen not to take out loans from banks. After all, this generally hasn’t been a great time to start or expand business ventures.
The sliver lining to this fiscal cloud is that you might find some blue-chip names selling at pandemic prices. I firmly believe that C stock is one of them. We’re talking about a stock that was trading at $80 in January.
On Oct. 8, C stock was priced at roughly $45 per share. That’s a significant discount and you might not get another chance to own a stake in Citigroup at this price.
In case you need more convincing that this is a bargain, consider that C stock’s trailing 12-month price-to-earnings ratio is an ultra-low 7.67. And for income-oriented investors, the forward annual dividend yield of 4.67% is a nice bonus.
What the Fed Said
Evidently, the Federal Reserve is concerned about the excessive use of stock share repurchases, also known as buybacks, especially among large financial institutions.
Thus, due to a new ruling by the Fed, large banks having more than $100 billion in total assets will, through the end of 2020, be barred from engaging in stock-share buybacks.
Of course, Citigroup has more than $100 billion in assets and therefore must abide by this restriction. Note, though, that the Federal Reserve commented that the capital positions of banks “have remained strong.”
The implied message, I suspect, is that banking giants are in a good enough financial position that they don’t need to prop up their stock prices through massive buyback programs. I tend to concur with this assessment.
Citigroup isn’t among the mega-cap companies that have relied excessively on share buybacks. It’s only a piece of the puzzle, not the whole puzzle. So, I wouldn’t wring my hands over this ruling if I were a holder of C stock.
Unloved Banks
Citigroup’s next quarterly earnings release is scheduled for Oct. 13. Don’t worry, it’s not Friday the 13th. But it is spooky if you let the fear-mongers sway your opinion.
The perceived problems, for the most part, aren’t specific to Citigroup. Instead, they weigh on the banking sector generally. I already mentioned the buyback ban, for example.
Other sector-wide headwinds include a sluggish economy due to Covid-19 and low interest rates (again, it’s that pesky Fed creating problems for the banking sector).
Brian Kleinhanzl, analyst and managing director at Keefe, Bruyette & Woods, seems to see the light at the end of the tunnel, however:
“Despite depressed valuations, we continue to view the group at market weight, as we believe near-term risks outweigh the long-term benefits that should emerge when the global economy recovers more meaningfully.”
That’s a fancy way of saying that things aren’t as bad as they seem at the mega-banks and should get better when the economy improves. Now, that’s what I call a true contrarian point of view, and I like the sound of it.
The Bottom Line
Wall Street, for the most part, doesn’t love big banks right now. However, if you’re a contrarian who feels that today’s problems aren’t permanent, there’s a convincing argument to be made in favor of C stock.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
