2023-05-10 09:45:00 ET
Summary
- The financial sector has been hit hard with consumers seeing three of the biggest bank failures since the great financial crisis.
- This has created big opportunities in a number of well-run financial institutions.
- All three of these stocks not only pay dividends, but they pay growing dividends at that.
The banking sector has been in turmoil over the past few months following the failures of a few large regional banks SVB and First Republic. Just this past week, it was announced that JPMorgan ( JPM ) would be acquiring the troubled financial institution, First Republic, for $10.6 billion . First Republic going under was the biggest US bank failure since the great financial crisis in 2008.
Even with the regional banks facing pressure, the Federal Reserve again announced another round of rate hikes, which sent volatility higher for the financial sector as a whole
Big banks, regional banks, small banks, and brokerages, no one in the sector has been spared all that much. However, for long term investors, this has created a great opportunity to add some high-quality financial exposure to your portfolio.
As a word of caution, given the turbulence the sector has seen, it is usually best to layer into the position rather than jumping in all at once.
3 Financial Stocks With Big Upside
Financial Stock #1 - JPMorgan Chase
JPMorgan Chase is the largest Bank in the US and is led by the great Jamie Dimon, who many agree is one of the best CEOs of his time and one of the best leaders within the banking industry.
JPM has a market cap of $400 billion and over the past 12 months, the stock is up 10%. Year-to-date JPM has squeaked out a 1% gain, thus far.
Banks got the Q1 earnings season started a few weeks back, with JPM being one of the largest companies to report first. They reported:
- Q1 GAAP EPS: $4.10 BEAT analysts expectations by $0.69
- Q1 Revenue $39.3 Billion BEAT by $2.53 Billion
- Net Income of $12.6 Billion
Revenue grew 25% yoy, which saw sizable increases from Net Interest Margin, as expected given the higher interest rates that have come along the past 12 months.
ROTCE is a closely watch metric in the banking sector, which measures the Return On Tangible Common Equity, came in at an astonishing 23%, driven by all divisions.
Also during the quarter, JPM repurchased $1.9 Billion in stock.
At the conclusion of the quarter, JPM ended with total assets of $3.7 trillion and the First Republic acquisition added roughly another $200 billion bringing total assets to nearly $4 trillion, making them the largest US bank in terms of assets
JPM also pays a dividend yielding near 3% with a 5-year dividend growth rate of 13% and a low payout ratio below 30%, making the dividend appear well covered.
In terms of valuation, analysts are looking for 2023 EPS of $14.32, which would equate to 18% growth from 2022. This calculates out to a 2023 EPS multiple of just 9.5x.
Single digit earnings multiple for the largest US bank seems very undervalued. For comparison purposes, the stock has traded at a 5-year average of 11.7x and a 10-year average of 12.2x, making the current valuation look quite intriguing.
19 Analysts rate JPM a Moderate Buy with an average 12-mo PT of $161, which implies 17.5% upside from current levels
Financial Stock #2 - Bank of America ( BAC )
Bank of America is the second largest US bank behind JPMorgan with a market cap of $221 billion. Over the past 12-months, shares of BAC are down 24%, with much of that coming in 2023 where the stock is down 17%.
Bank of America has long been a holding of Warren Buffett, who has owned various financial stocks over the years. However, since the mini financial crisis has taken place, Warren Buffett now only owns ONE financial stock, which is Bank of America. In a recent interview, Mr. Buffett alluded to his affection for the leadership of CEO Brian Moynihan.
In Q1, Bank of America reported EPS of $0.94 and Revenue of $26.3 billion. EPS grew 18% yoy and Revenues grew 13% yoy.
The bank also commented on the banking crisis and how they saw a flight to safety during that period in March. The Consumer banking division saw 130K new checking accounts and ROTCE, although it lagged JPM, was still a solid 17.4% during the quarter.
Net Income came in at $8.2B with Net Interest Income of $14.4B, an increase of 25% yoy.
Not only are BAC shares exciting from a valuation standpoint, but also from a dividend perspective. Shares of BAC currently yield a dividend of 3.2% with a low payout ratio of 26%. The company has also been aggressive when it comes to dividend growth over the past five years, as they have increased the dividend at an average annual rate of 15%.
Looking at valuation, analysts are looking for 2023 EPS of $3.43 which equates to a 2023 earnings multiple of 8.1x, even lower than JPM. Over the past five years, shares of BAC have traded at an average of 12x and over the past 10-years, closer to 14x.
In terms of price targets, 15 analysts rate the stock a Moderate Buy with a 12-month price target of $36, implying upside of 30%.
Financial Stock #3 - Charles Schwab ( SCHW )
This final financial stock we are covering is not a regular bank like the first two, instead it is a wealth management and brokerage company. Charles Schwab operates within two segments:
- Investor Services
- Advisor Services
Charles Schwab has gotten mixed up with the unrest going on within the regional financial sector as the stock has seen its market cap dip below $100 billion to $90 billion. Over the past 12-months, shares of SCHW are down 30%, but shares are down 40% year to date.
Charles Schwab is a well-run company that appears extremely oversold. The major fear around Charles Schwab was centered around outflows at the company. Obviously if customers take their money out, that is less money they have to make money from.
Last month, the company reported their Q1 earnings which showed:
- Revenues: $5.1 Billion
- Adj EPS of $0.93
Revenues increased 10% yoy and EPS increased 21% on the year.
Although the company continues to see outflows, they do see that trend slowing down since the start of the year. On the positive side, during the quarter, they posted a record first quarter with over $71 billion in net flows within their Advisor Services segment.
Total client assets totaled $7.58 trillion at quarters end, which was a 7.5% increase over prior quarter but a 3.5% decline from prior year.
With the stock falling hard during the quarter, we also saw some huge insider buys totaling $8.15 million at an avg price of $54. The largest purchase of $2.96 million came from the CEO and Co-Chairman, Walter Bettinger.
SCHW takes a much more conservative approach than what failed banks SVB or First Republic did, which is why I view this sell-off to be way overblown. The CEO and many directors seem to agree based on their stock purchases.
In terms of the dividend, SCHW offers a 2% yield, but the dividend growth has been tremendous at over 20% annually over the past five years.
Looking at valuation, analysts are expecting EPS to drop 16% to $3.27 which still has the stock trading at a 2023 earnings multiple of 15x, when over the past five years they have been closer to 20x and over the past decade closer to 25x. This is a much higher multiple than the big banks we looked at prior, but the EPS growth has been growing at a much faster rate as well.
In terms of price targets, 15 analysts rate the stock a Moderate Buy with a 12-month price target of $64, implying upside of roughly 30%.
Investor Takeaway
The financial sector has been in disarray since March, which has sent shockwaves through the banking sector, especially regional banks, but as we saw with Bank of America, even big banks were impacted.
There is certainly blood in the streets, but for long-term investors that also create opportunity. That is what I see when it comes to these three financial stocks. All three appear to be trading at intriguing valuations and all three pay growing dividends.
There is certainly further risks within the sector, especially if a recession hits the US, so it is best to layer into any position over time.
For further details see:
3 Financial Stocks With Big Potential Upside