Shares of Citigroup climbed by 13.23% on Friday, July 15, after the company reported earnings of $2.19 a share. Revenue came in at $19.6 billion. Wall Street had projected earnings of $1.689 a share and revenue of $18.4 billion.
So it’s not surprising that the stock rose strongly after the report. Or that the gains dragged other bank stocks higher too. For example, Bank of America (BAC), which reports on Monday, July 18, gained 7.04%. Wells Fargo (WFC) climbed 6.17%.
To which I say, Thank you, and I’m selling.
Why?
First, we remain headed into a recession (if we’re not there already), which won’t do anything positive for bank revenues and earnings or for stocks in general. To put it bluntly, I’m continuing to look for ways to reduce my exposure to what I continue to see as an ongoing bear market.
Second, while Citigroup obliterated Wall Street estimates, I’m worried by how the company produced its big beat.
Although earnings beat Wall Street estimates, they were down steeply from the $2.85 a share the bank reported in the second quarter of 2021.
In the second quarter of 2021 those earnings were a result of an improving post-Pandemic economy that convinced the bank that it could reduce reserves against losses. This quarter, however, with recession looming Citigroup added about $400 million to those loan loss reserves. In making those reserves Citigroup joined the club of other big banks that have reported so far: JPMorgan Chase (JPM), Wells Fargo, and Citigroup added $1.2 billion to reserves in the quarter.
Although I’m encouraged by the quarter’s 11% increase in loans and the 18% growth in its credit card portfolio, I’m also worried about those revenue streams as the economy heads into a recession.
I will sell Citigroup out of my Dividend Portfolio on Monday, July 18. I have a 14.02% loss on that position since I added Citigrojp to this portfolio on December 18, 2020.
The stock pays an attractive 4.08% dividend, but I think that for the next year or more, that high dividend is offset by the risk of a further drop in the stock’s price. (The stock was down 15.55% for 2022 as of July 15.)
The company goes ex-dividend on its 51 cents a share dividend on July 31. If you are more optimistic about the economy and the Federal Reserve’s July 27 decision to raise interest rates, you will consider holding through that date to collect the dividend.
In the longer term, I think Citigroup is about 30% undervalued. I don’t expect to see that fundamental value reflected in the share price, however, until the market sorts out its recession fears.
