Investors on the hunt for high-quality dividend growth stocks should take a closer look at the financial sector. Specifically, the big bank stocks have enjoyed a resurgence in the years after the Great Recession ended.
Over the past decade, the big banks have widely improved their balance sheets and are growing revenue and earnings. Citigroup (C) is arguably the best bank in the U.S. right now, due to its earnings quality and best-in-class brand. JP Morgan stock could be a buy today, due to its cheap valuation and attractive dividend growth.
Recent Earnings Fuel Investor Optimism
Citigroup’s recent first-quarter earnings report showed signs that the company’s momentum continues to build. On the surface, Citigroup’s results failed to impress. Revenue declined 2% from the 2018 first quarter. However, excluding the sale of the Hilton portfolio, revenue declined a more modest 1%. And, Citigroup managed a 3% reduction in expenses. Along with a 9% reduction in shares outstanding, this helped earnings per share increase 11% for the quarter.
Double-digit earnings growth is a very good sign for any company. Citigroup continues to benefit from an improving balance sheet and broader economic growth. As the U.S. economy continues to expand at a steady pace, the financial sector is a natural beneficiary. Citigroup should continue to see consistent growth in loans and deposits going forward.
Citigroup is also successful in cutting costs to boost profit margins, even if revenue declines. For example, in the most recent quarter Citigroup’s efficiency ratio of 57%, representing a decline (which indicates improvement) from 57.9% in the same quarter the previous year. As a result, Citigroup’s margins continue to improve, which helps grow EPS.
As earnings continue to grow at an impressive rate, Citigroup is able to return huge amounts of cash to shareholders.
Bank on Cash Returns
Citigroup returned over $5 billion to shareholders in the first quarter alone, consisting of share repurchases and dividends. The company’s aggressive share buyback program has helped fuel its strong EPS growth rate. Share repurchases reduce the number of shares outstanding, thus making each remaining share capture a higher portion of earnings.
In addition, Citigroup is a dividend growth stock. The company raised its dividend by 40.6% last year. Citigroup stock has an attractive 2.6% current dividend yield, with room for additional dividend increases thanks to its strong earnings growth. Citigroup is expected to generate annual earnings growth in the 8% range.
Better yet, Citigroup shares look cheap. Tangible book value was up 7% last quarter to $65.55 per share, meaning the stock trades for a very reasonable price-to-book value of 1.0-1.1 right now. A higher valuation multiple is warranted, given Citigroup’s earnings quality and strong balance sheet.
As a result, Citigroup stock could return over 10% to shareholders each year, consisting of earnings growth, dividends, and any change in the valuation multiple. This is an attractive potential rate of return for Citigroup stock, making it a highly attractive big bank stock today.
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