Billionaire Stanley Druckenmiller Is Buying a High-Yield Warren Buffett Stock That Looks Like a Bargain Now
2 days ago
If you're not a fund manager who has amassed over $1 billion in personal wealth, there's probably a thing or two you can learn from the handful of folks who have. A little experience goes a long way when it comes to investing, and there aren't many out there with more experience than Stanley Druckenmiller.
In 2010, Druckenmiller closed down the Duquesne Capital fund, which had posted an average annual return of around 30% for 30 years. He currently manages a relatively small family office, but that doesn't mean you can't follow his trading strategies.
The Securities and Exchange Commission requires all those managing more than $100 million in assets to disclose their trading activity every three months. From said disclosures, we can see Druckenmiller opened a new Citigroup(NYSE: C) position in the third quarter of 2024.
Druckenmiller isn't the only billionaire affectionate for the big U.S. bank. At the end of September, Warren Buffett's holding company, Berkshire Hathaway, was holding more than 55 million Citigroup shares.
Retail investors like us can learn a lot by watching successful fund managers. That said, it's important to realize that not every trade they make will work out as intended. Here's a closer look at what's attracting billionaires to this dividend payer to see if it could be a smart addition to your portfolio.
Over the past decade, Citigroup stock has underperformed peers Bank of America and JPMorgan Chase. As a result, it's trading at an ultra-low valuation of just 0.9 times its tangible book value. In other words, you can buy $1 worth of this bank's assets, minus its liabilities, for $0.90 at recent prices.
If tangible book value told a bank's entire story, we could all get rich by purchasing bank stocks that are trading below book value. But it's a little more complicated than that, because some banks are better at squeezing profit from their equity base than others.
A lackluster return on equity over the past several years is why investors continue to overlook Citigroup stock despite its shockingly low book value.
Many investors blame an inefficient, sprawling organization for Citigroup's lackluster earnings performance. Recently, though, the bank has trimmed underperforming international operations, and the progress is showing up in quarterly earnings reports.
Citigroup recently reported fourth-quarter earnings that reached $1.34 per share, which was $0.10 above consensus expectations. In addition to returning $2.1 billion to investors through dividends and share repurchases, the bank announced a new plan to repurchase $20 billion worth of its stock over the next several years.
After a few years of holding its dividend steady, Citi raised its payout in 2023 and again last year. At recent prices, the stock offers a 2.8% yield. That isn't a huge yield, but it's more than double the amount you'd receive from the average stock in the S&P 500 index.
Citigroup's present CEO, Jane Fraser, took the helm in 2021 with a multiyear strategy to simplify and modernize the bank. Last December, the bank took a big step forward with the separation of its institutional banking business in Mexico from Banamex, a collection of consumer, small-market, and middle-market businesses.
The institutional banking separation paves the way for a proposed initial public offering (IPO) of Banamex. Timelines for the complicated IPO aren't set in stone yet. Odds are good, though, that Buffett, Druckenmiller, and the rest of Citigroup's shareholders will have new shares of Banamex in their portfolios by the end of 2025.
Citigroup has made a lot of progress since announcing a plan to exit consumer banking in 14 markets around the globe in 2021. The bank has since closed operations in nine of those markets, and a sales process is under way in Poland. Plus, the company is nearly finished winding down consumer-focused operations in China, South Korea, and Russia.
In addition to a new $20 billion share-reduction program, Citigroup shareholders can look forward to significant payout raises over the next few years. The bank earned $5.94 per share last year, which is heaps more than it needs to meet a dividend obligation currently set at an annualized $2.24 per share.
It looks as if years of lackluster returns related to a sprawling operation are nearly over. Citigroup reported a return on tangible common equity that rose 2.1% year over year to 7%, and the gains aren't expected to stop there. Management expects this metric to reach a range between 10% and 11% in 2026 and continue rising.
Some dividend-focused investors might avoid Citigroup stock because it's yielding less than 3% at the moment. With profitability metrics moving in the right direction, avoiding this stock because of a lackluster dividend seems like a bad idea. With plenty of extra profit to reduce its share count and raise its payout, adding some Citigroup shares to a diversified portfolio now looks like a smart move for most investors.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Citigroup is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, and JPMorgan Chase. The Motley Fool has a disclosure policy.
