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Why I'm in No Hurry to Buy Citigroup Stock

The Motley Fool logo The Motley Fool 12/7/2022 Reuben Gregg Brewer

When it comes to banking, Citigroup (NYSE: C) has an iconic, dominant brand. However, if you step back and look at the history here, income-focused investors have taken some pretty big hits in the past.

For my money, I'd rather stick with a bank that has a better track record, a stronger financial position, and historically more conservative operations.

A nice yield

Citigroup's dividend yield today is about 4.3%, which is pretty attractive. For reference, U.S. peer Bank of America is offering a yield of just 2.4%. But I wouldn't rush out and buy Citigroup based on that, noting that during the Great Recession, the bank was forced to cut its dividend down to a mere penny a share. 

A bank teller providing service to a customer with a line behind them. © Getty Images A bank teller providing service to a customer with a line behind them.

That's nothing more than a token payment meant to allow institutional investors with a dividend mandate (such as endowments and pension plans) to continue owning the stock. That was a different time, of course, but I'd rather find a bank with a similarly high yield and a better dividend history, like Canada's Toronto-Dominion Bank (NYSE: TD), which didn't need to cut its dividend back then.

But there's another key reason to prefer TD Bank, as it is usually called, over Citigroup. The U.S. and other countries are in the process of increasing interest rates from historically low levels. It is very possible that this leads to a recession, which would reduce demand for bank products and increase loan delinquencies. That would be bad for banks, including Citigroup and TD Bank. So they prepare ahead of time.

One of the key ways to measure how prepared a bank is for such adversity is the Tier 1 capital ratio. Higher numbers are better here. Right now, Citigroup's Tier 1 ratio is about 12.2%, while TD Bank's ratio is 14.9%. TD Bank's Tier 1 ratio isn't just better than Citigroup's -- it also happens to be the second-highest in North America, meaning it is better positioned to deal with an economic downturn than all but one other bank in the region. 

TD Bank's yield is about 4.2%, which is a touch lower than what you'll get at Citibank, but giving up a few basis points of yield is probably worth it for the stronger Tier 1 ratio.

A strong core

There's nothing inherently wrong with Citibank, noting that the dividend cut came about because it got caught up in the housing crisis between 2007 and 2009. A lot of U.S. banks did, largely because banking regulations were looser in the U.S. than in Canada. Regulations have become more stringent since then, but Canada remains a highly conservative banking market. That has translated into TD Bank becoming highly conservative as well. 

An added benefit, however, is that TD Bank has a dominant position in its core Canadian market (about 57% of revenue) that is, effectively, protected by the government's strict regulations. That gives it a solid core from which to build out its business in the U.S., where there are more avenues for growth. In fact, the bank's only just begun to tap the U.S. banking market, with branches largely focused on the East Coast. That, in my eyes, provides a more attractive, balanced growth opportunity than Citigroup.

If you are looking at Citi...

Dividend investors looking at banks should consider more than just dividend yield. And if Citigroup's generous yield has drawn your attention, you might just want to consider TD Bank instead. If there's a recession in the cards, the Canadian bank looks like it is better positioned to handle it. And, given its still-growing presence in the U.S. market, it seems that TD Bank has pretty attractive growth prospects, too.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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