Growing leaner, Citi rates a `buy'

Your Money

May 20, 2007|By Andrew Leckey | Andrew Leckey,Tribune Media Services

What's up with Citi- group Inc.? I had expected more from this stock.

- R.R., via the Internet

With its traditional umbrella symbol recently replaced by a red arc over "Citi" in advertisements, the international financial-services giant is seeking a leaner, more aggressive image.

Perhaps it should have replaced that umbrella with a question mark.

There's still some uncertainty about whether Charles Prince, the former general counsel who became chief executive in 2003 and chairman in 2006, can effectively master this diverse, profitable empire assembled by his predecessor and close associate, Sanford Weill.

Citigroup shares (C) are down 4 percent this year, after a 15 percent rise last year, with investors wanting to know why results aren't as strong as those of some rivals. Shares had been flat in 2005 and 2004, after a 38 percent gain in 2003.

Earnings declined 11 percent in the first quarter due to a large restructuring charge and increase in credit reserves.

Feeling pressure to rein in expenses, Prince is cutting 17,000 jobs, or about 5 percent of its worldwide work force, to save more than $4.5 billion a year by 2009. In another belt-tightening move, Citigroup's Smith Barney unit changed its compensation plan to cover business expenses only for its brokers with $250,000 in production.

Consensus rating on Citigroup stock is "buy," according to Thomson Financial, consisting of seven "strong buys," seven "buys" and eight "holds."

The consumer business has disappointed, with credit losses, mortgage delinquencies and loan-loss reserves rising. Credit cards and retail banking have performed weakly, though bank deposits increased 20 percent last year.

The volatile businesses of investment banking and trading remain strong. In the first quarter, Citigroup ranked No. 1 in stock and bond underwriting transactions, with volume of $202.3 billion.

It recently purchased Old Lane Partners LP, a hedge fund with $4.5 billion in assets. Meanwhile, the company shook up top management in its own private bank that caters to more than 26,000 very wealthy clients in 31 countries.

Citigroup earnings are expected to rise 5 percent this year, slightly less than the overall forecast for banks based in the Northeast. Next year's earnings are projected to increase 13 percent, versus 10 percent industrywide. The five-year annualized return of 10 percent is slightly above its peers.

With presence in more than 100 countries, Citigroup plans to add 11 branches in South Korea and 14 more branches in China by year's end. It is adding branches in India and looking at the possibility of buying a bank in Germany.

What do you think of Fidelity Fund in my retirement account?

- V.L., via the Internet

This Fidelity Investments fund has been around since 1930, launched a few months after the 1929 stock market crash.

It traditionally has been a blue-chip, large-cap growth and value fund. Lately, however, it has tilted more toward growth, with nearly one-fifth of assets in technology. One of Fidelity's cheapest actively managed funds, it has a low 0.56 percent annual expense ratio.

The problem is that, despite its pedigree, performance has been less than historic for some time.

The $7.4 billion Fidelity Fund (FFIDX) increased 15 percent in the last 12 months and had a three-year annualized return of 13 percent. Both results rank around the midpoint of large-growth and value funds.

"Fidelity Fund has done fairly well, but we don't recommend it because there are significantly better large-cap growth options at Fidelity," said Jim Lowell, editor of the Fidelity Investor newsletter. "We will have a `hold' on it until we see some change in management because, while portfolio manager John Avery has done a good job, he could do a better job."

Avery, who has run the fund since 2002, managed Fidelity Advisor Balanced Fund from early 1998 to early 2002 with less-than-spectacular results. His performance had been stronger during a year and a half running Fidelity Advisor Growth & Income Fund.

He looks for firms with management teams that have sensible strategies but trade at a discount, typically making few major bets against the Standard & Poor's 500 index. Although that approach is logical and fundamentally sound, it decreases the potential for dramatic gains. That's why it typically places in the middle of the pack.

"It has never greatly underperformed or outperformed the S&P," said Lowell, explaining his lack of excitement.

Financial services and industrial materials are large concentrations in the portfolio.

What is the difference between a cash dividend and a stock dividend? Why do companies choose to pay one or the other?

- J.A., via the Internet

A cash dividend, the type investors are most familiar with, is a cash payout from a stock. It is offered by a company to attract and reward shareholders.

Most brokers offer investors a choice as to whether they wish to reinvest those dividends or take them as cash.

A stock dividend, on the other hand, is comparatively rare. It makes the dividend payment in the form of additional shares of the company, with the distributions generally taking the form of fractions per existing share held.

"Sometimes a company wants to reward its shareholders with a little perk, so it decides to give shareholders a stock dividend," said Sam Stovall, senior investment strategist with Standard & Poor's Corp. in New York. "If the investors choose to sell those shares, it's their business."

With the latest electronic capabilities, and the fact stocks are commonly held by brokerage firms in computerized accounts for investors, stock dividends have become easier to issue, Stovall said.

Andrew Leckey writes for Tribune Media Services.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.