6 Reasons To Buy Both Citi and BAC Stock Right Now!

- June 30, 2016

The much anticipated stress tests on U.S. banks are complete, with both Citibank (NYSE:C) and Bank of America (NYSE:BAC) performing fine. This means in bad economic conditions, both banks would survive. Given what happened in 2009, it is a vote of confidence from the Fed that is very important to Citi and BAC stock owners.

With that out of the way, BAC and Citi investors can now focus on the future, and what lies ahead for these two financial institutions. However, instead of trying to determine which is best, BAC or Citi stock, investors are best served buying both. There are six reasons why.

Both Citi and BAC stock are very cheap

A bank’s book value per share is the most important valuation metric for investors. For BofA and Citibank, there is a huge valuation disconnect between both stocks and their competitors.

BAC stock currently trades at 57% of its book value per share while Citi stock trades at 59%. Meanwhile, other large financial institutions like Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) trade at 100% or greater relative to their book values per share.

That said, BofA and Citibank most certainly have their fair share of problems. However, those problems are not so significant that their competitors who operate nearly identical business models are worth 100% valuation premiums. This degree of value makes BAC and Citi stock very appealing.

Fed-CCAR tests are no joke

Both Bank of America and Citigroup have struggled with stress tests in previous years. As a result, both banks have had issues getting big dividend payouts and large buyback programs approved by the Fed.

Given this struggle coupled with the increasingly difficult task of valuing such large institutions, investors have been unwilling to give either bank the benefit of the doubt. Yet, with both banks passing the test in a year where the Fed applied much more difficult “stress” scenarios, it serves as a huge vote of confidence for both stocks.

It illustrates that the suggestions for improved performance, like reductions in noninterest expenses and an improved efficiency rating in consumer banking & global markets, were really good indicators that investors should have taken more seriously.

Citi and BAC stock must catch up

Now that BofA and Citibank have passed a more difficult stress test and are priced so much below their competitors, one must believe that each stock will outperform peers like WFC and JPM as the market better values each entity.

Fact is that Bank of America and Citigroup are now in the same discussion as JPMorgan and Wells Fargo. However, BAC and C stock aren’t even close. Sooner or later, that gap must close. With both stocks being so cheap, it is not a bad idea to own both. After all, there are not too many better value investment opportunities in the market.

The dividends are no longer laughable

Prior to the stress test results, BAC stock paid a dividend yield of 1.5% and Citi stock had a yield of just 0.5%. Compare that to 3.3% for both WFC and JPM stock.

Since Bank of America and Citigroup passed their stress test, the Fed approved new dividend plans for each company. BofA’s yield will now be 2.2% and Citi’s annual payout will increase to more than 1.5%.

While neither are yet on WFC or JPM’s level, the gap is closing, and the far more attractive valuations might very well persuade many investors to settle with a smaller dividend in exchange for higher stock upside.

The buybacks are very significant

BofA was approved to buyback $5 billion of stock over the next year. That’s good for 3.7% of its share count at its current stock price. That may not seem like much, but over the course of one year, it will add significant buying pressure to BAC stock.

Citigroup was approved for a much larger $8.6 billion stock buyback plan. Therefore, Citigroup has the luxury to buyback 7% of its very cheap Citi stock whenever it desires. Furthermore, it’s a catalyst that value investors can really embrace.

BofA and Citi are now in charge

Perhaps the best and most significant reason that passing the stress test is a game changer for both stock is because it gives Bank of America and Citigroup control of their own destiny. It instantly gives each company’s board more sway with investors, and executive teams more influence over the board. Lastly, it creates trust on behalf of shareholders.

These may insignificant, but this opens up a world of opportunities that did not previously exist. For example, BofA could theoretically pursue a spinoff of its trading segment, Merrill Lynch, from its banking business. The combination has made valuing BofA very difficult.

Therefore, if executives now feel that a spinoff is in the best interest of shareholders to unlock hidden value, its board, investors, and regulators are more likely to embrace the idea due to the improved performance of the bank. Likewise, if Citi wanted to spinoff its international business it would have the same pull as BofA with Merrill.

The bottom line is that passing the stress test, being so cheap, and rewarding investors with a respectable capital return plan is a game-changer for both Bank of America and Citigroup. Therefore, why choose just one? Why not own both?

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4 Trackbacks

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