Citigroup Inc. (C)
I. Investment Highlights
Pricing (9/19/05 4:00 p.m. ET)
Closing Price $45.36 Company Profile
52-Week High $49.99 Headquartered in New York, NY, Citigroup Inc. (Citigroup) is a
52-Week Low $42.10 diversified holding company providing financial services
globally to consumers and corporations. Citigroup offers a wide
Valuation array of financial services through its subsidiaries. Citigroup’s
FY (Dec) Dil. EPS P/E
2003* $3.42 14.2
business segments include Global Consumer, Global Corporate
2004* $3.26 14.8 and Investment Bank, Global Wealth Management, Global
TTM $3.26 11.6 Investment Management, Private Banking and other investment
2005E -- 10.26i activities. Each of the subsidiaries are strong and viable
*excludes weighted average options businesses in their own right, but as a conglomerate, it is
Source: Thompson Financial Solutions seemingly impossible to estimate or even understand its
competitive advantages through synergies (e.g., using low
interest deposits to fund high-yield consumer loans, consumer
ROA 1.4% finance or credit cards). Through its subsidiaries, Citigroup
ROE 18.9% offers banking, lending, insurance, investment, mortgage, asset
Profit Margin 26.8% management, and wealth management services/products.
ROCI 6.5% Citigroup employs 287,000 people in 4,500 locations in 100
countries in its attempt to become the services group of choice in
Market Data fulfilling the financial needs of consumers and corporations
Total Assets (B) $1,547.8 alike. Citigroup sets itself apart from its top three competitors:
Volume (000) 12.048.3 JP Morgan Chase & Co., Bank of America Corp. and Deutsche
Market Cap (B) $234.51
Bank AG by the extent of its global breadth.
Avg Vol (000) 15,625.6
EPS (ttm) 4.04
P/E (ttm) 11.22 Growth Dynamics
Div & Yield 1.76 Under the red umbrella - Citigroup has experienced a three year
ttm- trailing 12 months; B - Billion revenue growth rate of 3.53%, which is much improved over
their five year revenue growth rate of 0.69%. Earnings growth
rate for three and five years are 6.48% and 7.42%, respectively.
Despite the one percent decrease in earnings over the same
Chad Parrish period, Citigroup’s dividends have increased 4.59%, up from
firstname.lastname@example.org 29.53%.i Global Consumer Net Income is up for the second
quarter ending June 30, 2005 in each major operating region1,
William Reynolds except Europe, Middle East and Africa (EMEA). Citigroup
email@example.com reported Global Consumer Net Income of $274 million, but
Total Global Consumer Net Income slid $205 million due to a
Matt Tinsley $497 million Global Consumer Net Income decline from the
same time a year before. However, Citigroup reported a $17
million increase for six months ended June 30, 2005, from the
same period ending June 30, 2004.
North America, Mexico, EMEA, Japan, Asia (excluding Japan) and Latin America
Typical of a business of its size, Citigroup is growing through acquisitions. First
American Bank in Texas (FAB) was added to the “red umbrella” of Citigroup, resulting
in the addition of 106 branches, 120,000 customers and $4.2 billion of assets under
management on March 31, 2005. Citigroup acquired a portfolio of $115 billion formerly
serviced by Principal Residential Mortgage, Inc. (PRMI) on July 1, 2004. Through the
acquisition of KorAm, Citigroup added $10 billion in deposits, $12.6 billion in loans,
$11.5 billion in Retail Banking, and $1.1 billion in card services. Amid the acquisitions,
Citigroup began divesting itself of businesses and portfolios totaling approximately $6.5
billion, citing non-strategic differences. On September 12, 2005, Citigroup announced an
agreement to sell a substantial portion of its Legg Mason Capital Market business to
Stifel Financial Corp (Stifel). Stifel will pay a premium in excess of the book value of
the assets being acquired.
Citigroup’s Retail Banking reported a net income of $1.241 billion and $2.550 billion for
the second quarter 2005 and the first six months of 2005, respectively. Total average
customer deposits have increased for the second quarter ending June 30, 2005 to $278.1
billion from $259.5 billion during the same period the previous year. Similarly, total
average loans increased to $215 billion in the second quarter 2005, up from $179.5
billion in the second quarter 2004. In sum, due to the solid performance of Citigroup’s
stellar subsidiaries, and despite their large size, it is still able to post double-digit revenue
II. Executive Summary
Citigroup Inc. is one of the largest employers in the United States and the around the
world. With 287,000 employees in 4,500 locations and in 100 countries, Citigroup has
developed a global brand to deliver financial services to its retail, corporate, and
institutional clients. This money center banking conglomerate is expected to return a
3.5% growth rate over the next three years according to some analyst estimates. As part
of a portfolio, Citigroup (C) will provide a high quality company with future growth
potential at an attractive price. Currently Citigroup trades at 11X its earnings; below the
industry as a whole and its direct competitors in most cases.
As detailed in this report Citigroup is not currently realizing much growth for its existing
business operations. However, overall growth is not out of the question as management
expects to continue its trend of global expansion. This conquering of the international
market is where we believe that Citigroup can realize its growth potential. Historically,
Citigroup has grown through acquisitions and mergers and it appears will continue to do
so under the leadership of Charles Price. What Prince intends to do is not simply grow
for the sake of becoming larger, but grow to align Citigroup with its strategic initiatives.
With $80 billion in revenue in the last twelve months and 15 brand names, Citigroup
dwarfs its competition.
Citigroup’s recent stock price has jumped largely due to the announcement on September
12, 2005 of the sale of part of its Legg Mason subsidiary to Stifel. Since the week before
this announcement, Citigroup’s stock price has increased and held nearly $2 per share.
Investment Recommendation: HOLD
• Large, well diversified financial services conglomerate fits nicely into portfolios
• With global expansion as its goal, Citigroup has an opportunity for future growth
• Relatively inexpensive stock price trading at only 11X earnings
• Increased corporate governance mechanisms renew investor confidence in
• Slowed growth recently with expected negative growth in the current quarter
• Decreased earnings estimates for current quarter in the most recent 90 days
• Constant growth valuation model prices Citigroup at approximately $39
• Underperformed the S&P 500 at every interval over the previous year
Citigroup’s short term outlook does not persuade us to recommend a buy decision.
However, we feel that this information has already been taken into the stock prices
because of the earnings adjustments. We do feel that in the future Citigroup will
overcome its problems and begin to realize its growth opportunities.
III. Company Description
Citigroup is the world’s largest financial services firm due to its global presence.
Citigroup expanded its global breadth with stakes in regional banks on the international
level. Domestically, Citigroup has over $1 trillion in assets with such subsidiaries as
CitiBank, CitiInsurance International Holdings Inc., CitiFinancial Credit Company,
CitiMortgage, GrupoFinanciero Bankamex and Smith Barney. Recently, Citigroup has
moved into the store-branded credit card segment and has made acquisitions of
complementary services companies. Citigroup, through its subsidiaries, is one of the
largest underwriters of stocks and bonds in the world. Citigroup has recently experienced
losses and negative publicity for possible conflicts of interest in IPOs, a $2.65 billion
settlement in the aftermath of WorldCom, $5 billion in legal fees and settlements
subsequent to the Enron scandal and misleading clients in the Japanese bank market.
Global Consumer serves individuals and small businesses via local branches, offices,
and electronic delivery systems (ATMs, the Internet, Automated Lending Machines
(ALMs), and the Primerica Financial Services (Primerica) sales force. Global Consumer
includes Cards (MasterCard, Visa, Diners Club and private label credit cards dba Citi
Cards), Consumer Finance and Retail Banking.
Corporate and Investment Banking (CIB) serves corporations, governments,
institutions and investors located in 100 countries with financial products and services.
CIB includes Capital Markets and Banking and Transaction Services.
Global Wealth Management is one of the leading providers of wealth management in
the world. Global Wealth Management includes the Smith Barney Private Client,
Citigroup Equity Research Businesses and the Citigroup Private Bank.
Alternative Investments is the management of private equity, hedge funds, real estate,
structured products and managed futures. Alternative Investments is responsible for the
management of Citigroup’s proprietary portfolio.
Charles Price assumed the role of CEO and Director in October 2003 subsequent to the
retirement of the legendary Sanford Weill, who will remain Chairman of the Board of
Directors through 2006. Some believe that Weill still has a disproportionate amount of
control of the day-to-day operations of Citigroup, compared to other Chairman.
Robert Willumstad became COO at the same time as Price became the top executive and
has most of the business unit leaders as direct reporters.
IV. Economic and Industry Environment
A recent Business Week article ("Citi: A Whole New Playbook", 2/14/2005) details the
ways in which Citigroup's culture has changed since Chuck Prince took over as CEO,
replacing empire-builder Sanford Weill. In 18 years as CEO, Weill built the largest
financial institution in the world. His boldest move was the 1998 merger with Travelers
Times have changed recently, as Prince sold off the last piece of Travelers Insurance. The
growth strategy has been altered as the company concentrates on core profitable
businesses; banking and credit card operations. According to the article, Price "took a
large step from its original goal of becoming a one-stop financial shop that produces all
its insurance and banking services." The idea of synergy between banking and insurance
was a reasonable one, but the reality was that there was little crossover between business
Prince now looks for "small, targeted investments that play to its strengths while selling
of businesses that have become dead weights."
That describes perfectly the “gin rummy strategy” that oligopolies have to master to
survive. Among units recently discarded are the Electronic Financial Services unit and
the equipment-leasing business, as well as a 20% stake in a Saudi financial group.
On the pickup side, Citigroup recently bought Washington Mutual Finance, a consumer
loan company, Knight Trading Groups' derivatives trading group, and ABN AMRO's
securities-clearing business. It's expected that more international expansion in
commercial banking will take place, given Citigroup's new cash influx from the Travelers
The process of getting just the right cards and making a coherent oligopoly is a complex
and dynamic one. Being big isn't enough; it's a matter of being big in the right market
segments. The following two charts express growth prospects at Citigroup, Inc.
Growth Rates and Outlook
Pct change EPS YTD vs. Last YTD: 63.4%
$ Change EPS YTD vs Last YTD: 0.78
Estimated EPS Growth (current FY) 4%
Estimated EPS Growth (next FY) 4%
Est. EPS growth rate 11%
Forward P/E Ratio 9.7
Price-to-Earnings Growth (PEG) 1
Source: CoreData, Inc
Revenue Est. Current Quarter Next Quarter Current Year Next Year
Avg. Estimate 20.47 B 21.60 B 85.60 B 90.27 B
No. of Analysts 4 3 5 4
Low Estimate 20.00 B 20.52 B 82.37 B 84.78 B
High Estimate 21.33 B 22.69 B 88.50 B 95.02 B
Year Ago Sales 20.51 B N/A N/A 85.60 B
Sales Growth -0.2% N/A N/A 5.5%
Citigroup is a highly diversified financial services provider and has $1 trillion in assets.
Citigroup operates not only throughout the United States but is also a prominent player
globally. Citigroup's growth through acquisitions is by no means unique. Rather, it is
reminiscent of the typical bank and non-bank consolidation that occurred in the nineties
and early two-thousands. Currently, thirteen financial holding companies hold more than
$100 billion in assets. The largest organizations now have countrywide presence and
offer a broad array of financial products even though there are more than 6,000 separate
banking organizations in the United States.
The financial services industry remains highly competitive despite the consolidation that
has taken place. Not only do banks face competition from non-bank financial service
providers, but they also encounter intra-industry competition. “Virtually every financial
product offered by the banking industry is also offered--either identically or by a close
substitute--outside the regulated financial services industry (www.federalreserve.gov).”
Technology has changed the banking industry in many ways. First, real-time access to
credit information and public records are possible due to technological advances from the
past decade. This ability to data mine allows providers of financial products to identify
target markets with minimal geographic restraint. This advancement has fostered
development of monoline-credit-card and mortgage lenders that have become major
market participants in a very short time. Second, technology has allowed organizations to
separate the various business functions, such as product marketing, credit review and
administration, and asset funding. The location of each of these functions is based on
separate criteria, such as the availability of labor or the tax environment. Third,
“technology has helped institutions monitor and manage risk by hedging exposure to
credit risk and interest rate risk or by selling certain assets in secondary markets
The fourth factor is the practically unanimous corporate goal of maximizing shareholder
value. The motivation for this goal is obvious. The stock market has awarded a price-
earnings premium to financial institutions that consistently outperform their competitors.
This premium translates into highly receptive capital markets and enhanced
compensation to employees through stock options and provides the institution with a
strong currency with which to pursue mergers or acquisitions.
Although all of these positive aspects of these environmental factors exist, so do the
potential negatives. The consolidation that has created these giant institutions has also
created many new risk-management challenges.
For example, enhanced competition has brought increased pressure on interest-rate
spreads, and when combined with the continual pressure for earnings performance, can
encourage either imprudent risk-taking or a push for aggressive accounting treatment.
One example of this is the fiasco with Arthur Anderson and Citigroup.
The following table is a comparison of Citigroup, Inc. with several of its biggest
BANKS RANKED BY ASSETS
Company Symbol Price Change P/E
Citigroup Inc. C 45.36 -0.20% 234.51B 11.22
Mizuho Financial Group, Inc. Private - View Profile
Sumitomo Mitsui Financial Group Inc. Private - View Profile
UBS AG UBS 85.15 -1.21% 86.52B 12.41
Deutsche Bank AG DB 91.50 -2.11% 42.44B 13.23
HSBC Holdings plc HBC 81.11 -0.27% 31.01B 13.73
JP Morgan Chase & Co. JPM 34.59 -1.14% 121.51B 19.64
BNP Paribas Private - View Profile
Bayerische Hypo- und Vereinsbank
Private - View Profile
Credit Suisse Group CSR 44.95 -1.40% 49.93B 12.98
V. Company Position
The fundamentals of marketing for Citigroup are described here. In this section we
briefly discuss how Citigroup practices marketing in relation to its product, price,
promotion, and distribution. Products of Citigroup are numerous and cover a wide array
of financial services from global consumer activities to asset and investment management
for individuals and businesses. The company is divided into three segments and two
stand alone businesses that provide a number of different products. The Global
Consumer Group serves domestic and international clients with diverse services offering:
banking, credit cards, loans, and insurance. The Corporate and Investment Banking
division advises companies, governments, and institutional investors on every aspect of
banking, capital and market access, and transaction and cash management. A global
focus allows Citigroup to access customers around the world, with branches in 100
countries, and provide these services to help clients reach their strategic mission. The
Global Wealth Management division’s goal is to maximize value for both its institutional
and private customers.
Citigroup is in business to serve its clients. In order to stay competitive they must
continue to offer these services at attractive prices. Its retail segment generally gets its
revenue in the form of interest on loans and fees associated with servicing those loans.
As a financial services company, it is difficult to compare their price within the industry.
When looking at revenues however, Citigroup has over $80 billion in revenue in the
previous 12 months while their nearest competitor, Bank of America, has only $53
Citigroup’s marketing activities in regard to promotion are extensive. They take
advantage of nearly every advertising medium; print, television, billboard, newspaper,
and internet. They have a very strong brand name both domestically and internationally
with over 15 brand names under the Citigroup umbrella.
Citigroup’s distribution channels are impressive, spanning worldwide to over 100
countries and their services are accessible all over the world via the Internet.
Product Development, R&D
Due to the fact that Citigroup is a financial services provider, they report no expenses in
Research and Development for the previous three years (Annual report). This is
consistent with the industry in which they operate. Their product development comes
with the services they provide to customers and how they package and sell those services.
Citigroup has a wide array of customers. They are extremely diversified in the products
and services that they offer. They offer loans and banking services to everyone from
low-income, sub-prime customers, to extremely high-wealth individuals and everywhere
in between. Depending on the brand name, Citigroup will target specific demographics
and cater their products to them. CitiFinancal focuses on community-based lending
where decisions are made at local branch offices. In contract, SmithBarney offers
financial planning and advisory to high net worth clients. In general, Citigroup attempts
to target a wide range of demographics and attempts to offer each group competitive
packages and services.
Threat of Substitution
The threat of substitution for Citigroup is very small. The industry is very mature and the
services provided have been around for years. Although the banking and financial
services industry has gone through some consolidation, the services offered are mostly
the same. The only threat that Citigroup faces is from competition in how the services
are provided. Barring some new financial innovations, Citigroup must only worry about
its competitors in service, not in products.
Citigroup actively participates in marketing its image to the customer. Recently, they
have taken an active role in aiding hurricane Katrina victims. They have pledged to
donate up to $8.2 million from The Citigroup Foundation. Also, they will make an
immediate $1 million donation and match any eligible employee donation dollar for
dollar up to $3 million.
However, Citigroup was involved in legal proceedings stemming from the WorldCom
debacle. They were involved in a settlement worth $2.6 billion and that was approved in
December 2004. This settlement is currently under appeal and no payments have been
made to date.
Citigroup management is made up of a diverse set of individuals from varying
backgrounds in finance and banking. It senior management team consists of over 50
members all around the world. Its board of directors has substantial independence with
individuals with backgrounds from ex-chairman at ChevronTexaco to one ex-President of
the United States.
Managements’ most recent success in 2004 included a major revamping of its corporate
governance systems. Its goal was to increase independence with a commitment to have
two thirds of the board designated as independent. They accomplished this goal and at
the end of 2004, 70% of the board was independent.
Citigroup’s future prospects are to continue to expand globally and increase their
distribution to growing markets. By creating a global presence, they believe that it will
contribute to meeting the needs of the local communities as well as attract foreign capital
VI. Financial Statement Analysis
• Inventory Valuation- Citigroup is a banking and financial services provider
therefore they do not carry inventory on their balance sheet.
• Depreciation- Citigroup has taken depreciation of over $2 million in 2004 from a
variety of sources but mainly from operating leases, premises, and equipment. No
accelerated depreciation was taken in 2004 or 2003 but $8 million was taken in
2002 due to restructuring initiatives.
• Investments Valuation- Other investment activities are primarily carried at fair
value with impairment write-downs recognized in income from “other than
temporary declines in value.”
• Intangibles- Citigroup amortizes intangibles over the period of their useful life,
unless their useful life is deemed infinite.
• Pension Plans- The company has several non-contributory defined benefit pension
plans and various defined benefit plans.
Trend Analysis (Citigroup vs. S&P 500)
Looking at the year to date chart for price changes we see that Citigroup has
underperformed the S&P at every interval throughout the year. In the current month to
date, Citigroup’s price change is less the S&P by approximately 15%.
Citigroup vs. Industry & S&P 500- 5 most recent days (as of Sept. 14th)
Here we notice that Citigroup has recently outperformed both the industry and the S&P
500. This could be due to the announcement of the sale of one of their subsidiaries, Legg
Mason, to Stifel in a $95 million deal that took place on September 12, 2005.
Direct Comparison to Industry and Competitors
DIRECT COMPETITOR Deutsche
COMPARISON Citigroup Bank America Bank AG J.P Morgan
C BAC DB JPM Industry
Market Cap: 233.27B 171.16B 43.05B 120.81B 16.40B
Employees: 287,000 175,742 65,417 160,968 23.70K
Qtrly Rev Growth (yoy): -4.20% 3.10% 11.20% 44.20% 8.10%
Revenue (ttm): 80.82B 53.36B 27.74B 48.39B 5.71B
Gross Margin (ttm): N/A N/A N/A N/A 0.00%
EBITDA (ttm): N/A N/A N/A N/A N/A
Oper Margins (ttm): 52.18% 57.44% 33.03% 38.18% 48.69%
Net Income (ttm): 20.94B 16.59B 3.59B 6.31B 1.02B
EPS (ttm): 4.041 4.045 6.946 1.761 1.96
P/E (ttm): 11.17 10.53 13.36 19.53 15.87
PEG (5 yr expected): 1.02 1.1 0.88 1.17 1.34
P/S (ttm): 2.89 3.21 1.53 2.48 3.23
Citigroup is by far the largest of its competitors in terms of market capitalization and
revenues. Its operating margins are strong but not better than Bank of America’s. We
can see that Bank of America makes $0.57 operating income for every $1 revenue, while
Citigroup makes only $0.52. In comparing the revenue growth, we see that Citigroup has
negative revenue growth compared to the previous year. All other competitors, as well as
the industry, have had positive revenue growth for the same period. This could be a
signal that Citigroup has exhausted all of its revenue opportunities or that something else
is causing their revenues to decrease.
VII. Financial Forecasts (from analysts)
Revenue forecasts (from finance.yahoo.com)
Earnings estimate (next quarter Dec. 2005) $1.02
Revenue estimate (next quarter Dec. 2005) $21.60B
Growth estimate (current) -3.6%
Current Quarter Next Quarter Current Year Next Year
Current Estimate $0.98 $1.02 $4.04 $4.42
7 days ago 0.98 1.03 4.04 4.43
30 days ago 0.98 1.03 4.05 4.43
60 days ago 1.03 1.07 4.15 4.57
90 days ago 1.04 1.08 4.20 4.62
Looking at previous EPS estimates we can see that over the past 90 days, Citigroup’s
earnings estimates have been adjusted down significantly. For example, 90 days ago the
EPS estimate for next quarter was $1.08. Today, the current estimate is for next quarter
is $1.02. This is also consistent when analyzing the trends for year over year estimates.
This could signal a potential problem at Citigroup. For some reason, analysts expected
earnings to be higher and have since re-adjusted those estimates to lower numbers. This
a cause for concern for Citigroup’s stock price because the market pays close attention to
whether or not a company meets it earnings estimates.
Growth Estimates and Trend Analysis
Growth Estimates C Industry Sector S&P 500
Current Qtr. -3.90% 6.80% N/A 17.60%
Next Qtr. 0.00% 9.40% N/A 15.50%
This Year 0.00% 6.30% N/A 14.40%
Next Year 9.40% 9.20% N/A 11.40%
Past 5 Years (per
annum) 10.50% N/A N/A N/A
Next 5 Years (per
annum) 11.00% 10.08% N/A 10.63%
categories) 11.3 12.22 N/A 16.16
Currently Citigroup’s growth estimate for this quarter is -3.90%. Compared to the
industry and the S&P 500, this is significantly lower. It is also worth noting that
estimates of growth for next quarter and subsequently the entire year show no sign of
growth. This tends to support that the current and near future appear bleak for Citigroup.
Especially when comparing their growth estimates to that of the entire industry and the
VIII. Analysis of Risk
Citigroup Inc is traded on the New York Stock Exchange as ticker symbol “C” and
appears in many indexes. These indexes include the Dow Jones Composites, Dow Jones
Industrials, S&P 100, S&P 500, and the S&P 1500 Super Composite
(finance.yahoo.com). During the last three months the average trading value for
Citigroup Inc. was 15,625,600 shares daily (finance.yahoo.com). During the last 12
months the low share price was $42.10 and the high was $49.99 (finance.yahoo.com).
The standard deviation, or relative risk, was measured at approximately 1.80 with a
correlation of 0.115706 (see chart below). The Beta with market/industry is 1.17 over the
last 36 months or 1.28 over the last 60 months (Factiva Report).
a. Trading Location – NYSE (C) www.yahoo.com
b. Average Volume – Last 3 months 15,625,600 www.yahoo.com
c. Range 52 week range 42.10 – 49.99 finance.yahoo.com
d. Standard Deviation 1.79
e. Correlation to market/industry 0.12
Observation X Mean (X-M) (X-M)2 Market
Jan-04 46.84 45.3081 1.5319 2.346718 1131.13
Feb-04 47.58 45.3081 2.2719 5.16153 1144.94
Mar-04 48.94 45.3081 3.6319 13.1907 1126.21
Apr-04 45.9 45.3081 0.5919 0.350346 1107.3
May-04 44.32 45.3081 -0.9881 0.976342 1120.68
Jun-04 44.39 45.3081 -0.9181 0.842908 1140.84
Jul-04 42.47 45.3081 -2.8381 8.054812 1101.72
Aug-04 44.87 45.3081 -0.4381 0.191932 1104.24
Sep-04 42.5 45.3081 -2.8081 7.885426 1114.58
Oct-04 43.13 45.3081 -2.1781 4.74412 1130.2
Nov-04 43.5 45.3081 -1.8081 3.269226 1173.82
Dec-04 46.84 45.3081 1.5319 2.346718 1211.92
Jan-05 47.68 45.3081 2.3719 5.62591 1181.27
Feb-05 46.81 45.3081 1.5019 2.255704 1203.6
Mar-05 44.08 45.3081 -1.2281 1.50823 1180.59
Apr-05 46.49 45.3081 1.1819 1.396888 1156.85
May-05 46.64 45.3081 1.3319 1.773958 1191.5
Jun-05 45.77 45.3081 0.4619 0.213352 1191.33
Jul-05 43.5 45.3081 -1.8081 3.269226 1234.18
Aug-05 43.77 45.3081 -1.5381 2.365752 1220.33
Sep-05 45.45 45.3081 0.1419 0.020136 1237.91
Standard Deviation = 1.796689
f. Beta with market/industry 1.17 (36 Month)
1.28 (60 Month) (Factiva Report)
IX. Fundamental Valuation
Estimation of Required Rate of Return
The required rate of return has been estimated from a series of data over the previous nine
years. We use the assumption here that what has happened in the past has a reasonable
change to continue in the future. The S&P 500 has been used as a proxy for the market.
Also, we use historical rates on the 1-year T-bill as an estimation of the risk free rate of
interest. For the periods 1995-2004 the historical equity premium on the market was
6.38%. This is a geometric mean average rate of return. In order to compute the required
rate of return for Citigroup we used the Capital Asset Pricing Model:
RE = RF+ β(Equity Risk Premium)
RE = 4.3 + (1.28) (6.38) = 12.46%
Date DPS Share Price Dividend Yield S&P 500 Yield
2000 0.52 1.02
2001 0.6 50.48 1.189% 1.19
2002 0.7 35.19 1.989% 1.55
2003 1.1 48.54 2.266% 1.39
2004 1.6 48.18 3.321% 1.43
Forward annual dividend yield
Trailing Annual Dividend Yield
*Dividend yields calculated based on the annual dividend paid by Citigroup.
The valuation techniques that were used include, but are not limited to: 1) estimating
future dividends with constant growth, 2) the value of a stock using the constant growth
model, and 3) estimating the growth rate.
Future Dividends w/ Constant Growth
Value of Stock Using the Constant Growth Model
Forecasted Growth Rate
g=(1-p) * ROE
A brief snapshot of financial performance and relevant ratios includes: (as of Sept. 13,
2005) Note: Information in table used for valuation, see page 1 for up-to-date figures.
Stock Price 45.01
Market Capitilization 230,637,300
Dividend Yield 3.82%
Dividend Payout Ratio 49.10%
Required Rate of Return 12.70%
Forecasted Growth Rate 8.04%
5 Yr. High P/E Ratio 21.1
5 Yr. Low P/E Ratio 7.7
5 Yr. Avg. P/E Ratio 15.2
P/E Ratio: 1 month Ago 10.8
Growth Rates 5 yr. R Sq. of 5 yr. Growth Rate
Revenue 0.69 1.8
Income 7.42 88.6
Dividend 29.53 94.6
X. Other Considerations
Benjamin Graham Stock Selection Criteria (as of 9-14-05)
AAA bond yield- 5-yr: 4.08; 10-yr: 4.6; 20-yr: 5.11
1. An earnings-to-price yield at least twice the AAA bond yield.
[Earnings-to-price: 3.26/44.61=.073 (EPS/stock price)]
Passes Criteria: 7.3 < 8.16(2×4.08)
2. A price-earnings ratio less than 40 percent of the highest price-earnings ratio the
stock had over the past five years. [P/E: 11 ttm; 5-year high P/E: 21.1]
Fails to Pass Criteria: 21.1×.4=8.44 > 11
3. A dividend yield of at least two-thirds the AAA bond yield. [3.96%]
Passes Criteria: 3.96% > 4.08×⅔=2.72
4. Stock price below two-thirds of tangible book value per share.
[Price: $44.66; Tangible Book-Value per share: 12.72]
Fails to Pass Criteria: 44.66 > 12.72×⅔=8.48
5. Stock price two-thirds "net current asset value." [Current Assets – Liabilities:
Unable to Test Criteria: Undisclosed Inventory and Other Current Assets
6. Total debt less than book value
[Total Debt: 274,677,000,000; Book Value: 109,291,000,000]
Fails to Pass Criteria: 274,677,000,000 > 109,291,000,000
7. Current ratio greater than two.
Unable to Test Criteria: Current ratio not reported (undisclosed Inventory and Other Assets)
8. Total debt less than twice "net current asset value.
[Total Debt: 274,677,000,000; NCAV is negative]
Unable to Test Criteria: Undisclosed Inventory and Other Current Assets
9. Earnings growth of prior ten years at least 7 percent on an annual basis.
[2003-2004: -.0452; 2002-2003: .1687]
Fails to Pass Criteria: Negative Earnings Growth (2003-2004)
10. Stability of growth of earnings in that no more than two declines of 5 percent or
more in the prior 10 years.
[2003-2004: -.0452; 2002-2003: .1687]
Fails to Pass Criteria: .1687+.0452=.2139
Top Institutional Holdersª
Holder Shares % Out Value* Reported
STATE STREET CORPORATION 269,739,905 5.19 $12,122,111,330 31-Mar-05
BARCLAYS BANK PLC 263,363,638 5.06 $11,835,561,891 31-Mar-05
AXA 169,337,195 3.26 $7,610,013,543 31-Mar-05
WELLINGTON MANAGEMENT COMPANY, LLP 146,412,617 2.81 $6,579,783,007 31-Mar-05
FMR CORPORATION (FIDELITY MANAGEMENT
125,943,281 2.42 $5,659,891,048 31-Mar-05
& RESEARCH CORP)
VANGUARD GROUP, INC. (THE) 115,412,655 2.22 $5,186,644,715 31-Mar-05
CAPITAL RESEARCH AND MANAGEMENT
102,669,865 1.97 $4,613,983,733 31-Mar-05
JP MORGAN CHASE & COMPANY 83,564,668 1.61 $3,755,396,179 31-Mar-05
NORTHERN TRUST CORPORATION 71,557,740 1.38 $3,215,804,835 31-Mar-05
Mellon Financial Corporation 66,852,263 1.29 $3,004,340,699 31-Mar-05
Top Mutual Fund Holdersª
Holder Shares % Out Value* Reported
VANGUARD 500 INDEX FUND 48,853,394 .94 $2,353,756,522 31-Dec-04
COLLEGE RETIREMENT EQUITIES FUND-
35,846,198 .69 $1,727,069,819 31-Dec-04
FIDELITY MAGELLAN FUND INC 34,465,753 .66 $1,548,890,939 31-Mar-05
WASHINGTON MUTUAL INVESTORS FUND 30,808,500 .59 $1,384,533,990 31-Mar-05
SPDR TRUST SERIES 1 22,761,117 .44 $1,004,220,482 30-Sep-04
VANGUARD INSTITUTIONAL INDEX FUND-
22,251,293 .43 $1,072,067,296 31-Dec-04
INSTITUTIONAL INDEX FD
VANGUARD/WINDSOR FUND INC. 22,090,246 .42 $1,083,526,566 31-Jan-05
VANGUARD TOTAL STOCK MARKET INDEX
19,750,906 .38 $951,598,651 31-Dec-04
DAVIS NEW YORK VENTURE FUND 19,097,316 .37 $936,723,349 31-Jan-05
VANGUARD/WINDSOR II 18,997,673 .37 $931,835,860 31-Jan-05
ªSource: Major Holders – http://finance.yahoo.com
*Value shown is computed using the security’s price on the report date given
After evaluation of the data presented in this paper, the analysts have some concerns
about Citigroup’s performance. There are many positive aspects of Citigroup’s business
that are attractive for investors. They are the largest company in the money center bank
industry with a market capitalization of 234.51B and revenues totaling 80.82B. They
have a global focus and offer services in over 100 countries. For the period 2000-2004
Citigroup has had compound annual growth rate of 8% in net revenues. For the same
period, their income from continuing operations grew at 9% compounded annually. They
have recently sold off one of their subsidiaries, Legg Mason, to Stifel which has
increased the share price slightly since then. Also, Citigroup has gained publicity from
its involvement in hurricane Katrina clean-up efforts by pledging financial resources to
aid victims of this disaster.
Taking a closer look into this company, however, there is some information which may
paint a different picture as to the future of Citigroup as an investment. Recently,
Citigroup’s growth as slowed and its projected growth estimate for the current quarter is
-3.09%. Compared to the industry expected growth for the same period of 6.8% and the
S&P 500 expected growth of 17.6%, this is not a good sign for Citigroup. This trend of
no growth is expected to continue for the rest of the year. Analysts do, however, expect
Citigroup to rebound with 9.4% growth next year.
Another factor to look at is the earnings estimates for the current and upcoming quarters.
The current estimate of earnings for this quarter is $.98, down from this same quarter’s
estimate 90 days ago of $1.04. As stated in the Financial Forecasts section of this report,
this trend is consistent for the remainder of the year and next year. This is a bad signal
for Citigroup because much attention is paid by investors to earnings estimates. A
decrease in the estimate, and subsequently not meeting the estimate, is a negative signal
for the company.
The Beta of Citigroup is 1.28 so it is more risky than the market. Thus, when the market
is up, we should expect Citigroup to be up by more than the market. This has not been
the case over the past year. In the chart showing a comparison of price changes of
Citigroup and the S&P, we can see that Citigroup’s actual price performance has been
significantly below that of the S&P. This must be due to some firm specific factors that
are causing the company poor price performance.
Citigroup has also taken a hit on its corporate image in recent years due to some
corporate governance issues and scandals relating to WorldCom and Enron. Although
they have been compliant with SEC regulators, this still reflects poorly on them and
reduces investor confidence.
In looking at the fundamental analysis, using the constant growth model, the value of
Citigroup’s stock should be trading at $39.08. This is derived assuming a required rate of
return of 12.46% and a dividend growth rate of 8.036%. The value that we have
calculated is currently less than what the stock is trading for; $45.36.
Upon considering the ten rules developed by Ben Graham (the Ben Graham Criteria), it
quickly becomes apparent that Citigroup fails to meet the reward and risk criteria. Rules
one thru five consider the reward associated with the stock and rules six thru ten consider
the risk of the stockiii. It was not possible to analyze three of the criteria due to
undisclosed inventory and other assets. Of the seven criteria analyzed: five failed to pass,
while just two passed (the two that passed the criteria were in the reward criterion). It
goes without saying that Ben Graham would not invest in a company that failed five of
the ten criteria (giving the benefit of the doubt to the three criteria that were undefined).
As for the recommendation on Citigroup as an investment it is difficult to determine
whether to buy or sell due to the conflicting analysis presented above. There are many
signs indicating that Citigroup is a strong company with excellent future prospects.
However, there are again some signals Citigroup may be a bad investment. Given the
limitations of the timing of this investment report, our recommendation is to hold this
stock. From the data presented here we believe that Citigroup is struggling currently but
has bright long-term prospects.
Disclaimer: This analysis does not necessarily reflect the beliefs of the University of
Missouri-Columbia or the College of Business. The insights and opinions are of the
students of Investment Funds Management and should not be used in personal investment
decisions. The University of Missouri and the authors of this analysis take no
responsibility for the validity of the valuation and analysis.
Source: CoreData, Inc.
Information regarding Citigroup Subsidiaries obtained from Citigroup Inc Form 10-Q (06/30/05)