Q. What do you think the future holds for my shares of Citigroup Inc.?
J.T., via the Internet
A. The world’s largest financial-services firm is highly profitable, has a diverse product line, aggressively acquires companies and does business in more than 100 countries.
All of that, however, also subjects it to the vagaries of global economies, financial markets, interest rates and credit quality. In addition, it is paying a high price for past financial ties to scandalous companies.
Shares of Citigroup (C) are down 9 percent this year, following last year’s 1 percent decline. Recent quarterly profits were less than expected because rising interest rates hurt its bond trading and bankruptcies trimmed credit card results.
There is ongoing commotion in the top ranks.
Chairman Sanford Weill, 72, recently said he’ll stay on until April, squelching reports that he’d leave earlier to start a private equity fund. The possibility of dealmaker Weill becoming a competitor had unsettled the company and investors. Negotiations for his earlier retirement bogged down when the board vetoed perks such as a corporate jet and security detail.
Meanwhile, President and Chief Operating Officer Robert Willumstad is leaving to seek the top post at another company. Willumstad was named chief operating officer as consolation prize when Charles Prince became chief executive in 2003. Also exiting is Marge Magner, global consumer banking head and one of the nation’s highest-ranking female bankers.
Top boss Prince is thinking long term, cutting loose less-profitable units and emphasizing internal controls as he tries to rid Citigroup of lingering ethical and regulatory problems.
Citigroup is partnering with three other financial-services firms and the Boston Stock Exchange to launch an electronic stock exchange in 2006 called the Boston Equities Exchange. It has invested $3.75 million for a 5 percent stake in the Philadelphia Stock Exchange.
Bank acquisitions in Asia, Latin America and Eastern Europe are planned.
The consensus analyst recommendation on Citigroup shares is a “buy,” according to Thomson Financial, consisting of five “strong buys,” 11 “buys” and five “holds.”
Citigroup will pay $2 billion to settle a class-action lawsuit over its role in Enron Corp.’s accounting fraud. It agreed to pay WorldCom Inc. investors $2.6 billion last year. It is shelling out $208 million to settle fraud charges against an affiliated transfer agent for Smith Barney mutual funds and paying $25 million in fines for improper British bond trading.
Earnings are projected to increase two-tenths of a percent this year, versus 6 percent expected for the money center bank group. Next year’s expected increase of 9 percent is in line with industrywide forecasts. The projected five-year annualized growth rate for the company of 11 percent compares to 10 percent forecast industrywide.
Q. I’d like to know your opinion of Dreyfus Appreciation Fund, which has been recommended.
D.T., via the Internet
A. Nobody’s perfect. Holding shares of embattled AIG Inc. and Merck & Co. has whacked this fund’s returns.
Its emphasis on multinational companies has generally been a drawback during a period in which small-cap stocks have dominated. Yet it has improved a bit this year because it holds 20 percent of its assets in energy stocks.
The $4.59 billion Dreyfus Appreciation Fund (DGAGX) has posted a total return of 9 percent over the past 12 months and has a three-year annualized return of 8 percent. Both returns rank in the lowest 15 percent of large growth and value funds.
“Expect Dreyfus Appreciation to look good in some markets and not good in others, but nonetheless be an intriguing long-term core holding in an individual’s portfolio,” said Gareth Lyons, analyst with Morningstar Inc., noting it has largely kept pace with the benchmark Standard & Poor’s 500 over the past decade. “It also has a relatively cheap annual expense ratio of 0.95 percent.”
It holds more consumer goods companies and fewer technology firms than other blue-chip funds because management seeks high-quality earnings, clean balance sheets and free cash flow. There is tax efficiency thanks to a buy-and-hold approach.
Consumer goods and energy each represent about 20 percent of the fund’s portfolio. Other significant concentrations are health care and financial services. Top holdings were recently Exxon Mobil Corp., Altria Group Inc., Intel Corp. and General Electric Co.
Dreyfus Appreciation Fund has an experienced management committee led by Fayez Sarofim, who has been on board since 1990. This “no-load” (no sales charge) fund requires a $2,500 minimum initial investment.
If you own several Dreyfus funds, be careful to avoid portfolio overlap. Morningstar notes that Dreyfus offers 20 large-cap funds, most a blend of growth and value, and would prefer that it consolidate its lineup.
Q. I have seen many advertisements for investments called SPDRs and VIPERs. What are they and how do they work?
A. Those are product names that companies have given to exchange-traded funds. You can buy them throughout the trading day on an exchange as you would an individual stock, but they invest in a broad basket of individual stocks like a mutual fund would.
SPDRs, or Standard & Poor’s Depository Receipts, are exchange-traded funds that track the S&P 500 or other indexes.
VIPERs, or Vanguard Index Participation Receipts, are exchange-traded versions of Vanguard Group index funds.
“We like ETFs for our clients because costs are lower than a typical open-ended mutual fund,” said Mark Balasa, certified financial planner, CPA and co-president of Balasa Dinverno Foltz & Hoffman financial advisers in Schaumburg. “They are tax-efficient, with no capital gains distributions to surprise you as would be the case with an open-ended mutual fund.”
But they’re not as good a deal for an investor putting in small amounts each month because of their transaction charges for each purchase, Balasa added.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.
