Figuring Out The Financials

4/3/2017


The average financial stock in the S&P 1500 Index is up 19.5% since the Nov. 8 election, trouncing the 13.3% average for all stocks in the index. The thinking goes that financials will benefit from corporate tax cuts, industry deregulation, and higher interest rates.

S&P 1500 FINANCIALS BY THE NUMBERS
The average financial stock in the S&P 1500 Index is up 19.5% since the election and appears expensive at 20 times trailing earnings. The P/E ratio drops to a reasonable 17 based on expected current-year earnings, reflecting profit growth sparked by higher interest rates and potential moves by the Trump administration.
Return
Since
Nov. 8
Election
(%)
--------------- P/E Ratio ---------------
-- Quadrix Scores --
Industry
(Number Of Companies)
Trailing
5-Year
Average
Estimated
Current
Uear
Value
Overall
Asset management (18)
16
20
21
17
69
70
Consumer finance (13)
26
19
13
13
80
69
Diversified banks (6)
26
16
12
14
74
85
Financial exchanges (10)
11
28
25
24
41
69
Insurance brokers (6)
18
22
19
19
49
47
Investment banking (12)
22
21
20
18
62
70
Life & health insurance (11)
22
18
12
11
85
81
Multi-line insurance (7)
14
19
13
15
67
54
Multi-sector (2)
27
17
17
18
56
64
Ppty. & casualty ins. (25)
19
20
13
17
70
71
Regional banks (81)
20
19
16
17
61
75
Reinsurance (6)
10
22
10
13
73
77
Thrifts & mtg. finance (14)
22
21
17
20
59
63
S&P 1500 fin'l stocks (211)
20
20
16
17
65
71
Note: Quadrix scores are percentile ranks, with 100 the best.

So far, one part of that scenario is playing out. On March 15, the Federal Reserve increased the federal funds rate by a quarter percentage point — only the third increase since June 2006 — to a range of 0.75% to 1.0%. The benchmark rate was also raised a quarter point in December.

Fueled by gains in the economy, the Fed is expected to boost rates at least two more times this year and has penciled in three hikes for 2018. Ultimately, rates are expected to reach 3% by the end of 2019.

Why are rate hikes a powerful driver? For banks and thrifts, higher rates boost net interest margin (the spread between the interest paid on deposits and the interest earned on loans and investments). Meanwhile, higher rates allow insurance companies to earn better returns on the premiums they collect from policyholders.

The linked table lists nine standout financial stocks, including five from sister publication Upside, that should benefit from higher interest rates. The stocks earn strong Quadrix scores, appear reasonably valued, and are expected to deliver solid profit growth this year.

Citizens Financial Group ($34; CFG) offers investors the promise of outsized growth for its dividend, initiated in 2014. Citizens hiked its quarterly dividend 20% in 2015 and 17% this past January to $0.14. More telling, management said it targets a 2017 dividend payout ratio of 30% to 35%, up from its 2016 range of 25% to 30%.

The latest dividend increase pushes the bank's payout ratio to 29% of trailing earnings. But its per-share profits are projected to grow 18% to $2.28 this year, and analyst estimates have steadily marched higher over the past 90 days. Based on the current consensus, Citizens' new payout ratio implies a quarterly per-share dividend of $0.17 to $0.20. The stock yields 1.6%, below the average of 2.0% for S&P 500 regional banks.

Citizens shares have jumped 28% since the Nov. 8 presidential election, ahead of average gains of 20% for the S&P 1500 financial sector and 18% for regional banks. Despite that rally, Citizens' stock appears reasonably valued at 15 times estimated 2017 profits, in line with its industry average. Citizens Financial is a Focus List Buy and a Long-Term Buy.


J.P. Morgan Chase ($88; JPM) shares have surged 27% since the presidential election, benefiting from the rising tide for most bank stocks. The bank's rally comes at a time of improving operating momentum. J.P. Morgan's annual sales rose 5% last year, while its net interest margin improved to 2.3% from 2.1%; that's the first growth for either metric since 2009. Net interest margin, the spread between the interest banks pay on deposits and the interest they charge for loans, is expected to rise again in 2017.

J.P. Morgan recently raised its dividend 4% to $0.50 per share, payable April 30. That dividend hike comes earlier than normal — since 2013, J.P. Morgan's dividend hikes had occurred in the September quarter. Additionally, each of its previous two dividend increases exceeded 9%. The odd timing and size of the dividend boost invites speculation that J.P. Morgan may be planning a second increase later this year, once the Fed approves the capital-return plans for banks. Of the six diversified banks in the S&P 500 Index, only J.P. Morgan and Wells Fargo ($56; WFC) currently pay dividends that surpass pre-recession levels. J.P. Morgan is a Buy and a Long-Term Buy.


With a market capitalization of $3.7 billion, Primerica ($81; PRI) is far from the largest seller of life insurance, mutual funds, and annuities. But with nearly 117,000 insurance and 24,000 mutual-fund representatives in the U.S., the company's sales force dwarfs its rivals. Primerica's salespeople are independent contractors who pay their own expenses and generally work part-time, often from home. An expanding headcount is driving growth. Last year the insurance unit added more than 10,000 sales reps, up 9% from a year earlier.

Primerica is a top pick among life and health insurers — a standout industry in Quadrix. The 24 insurers in our research universe earn an average Overall score of 73, ranking the group number 10 among more than 150 industries. Primerica earns an Overall score of 97, with scores above 90 for Quality and Performance. For 2017, the consensus calls for per-share earnings of $5.23, up 15%. Revenue should climb 5%. Primerica is rated Best Buy in our sister publication Upside.


Zions Bancorp ($41; ZION) is the second-smallest of the 11 S&P 500 regional banks by market value. But it has historically been more profitable than its peers, a trend that continued last year. Zion's net interest margin rose to 3.4% from 3.2% in 2015, marking the biggest improvement in the regional bank industry, which averaged 3.0%.

Leveraged to the improving economy, Zions anticipates moderate loan growth and higher customer fees in 2017, partly offset by increased noninterest expenses. Also encouraging, its portfolio of energy loans, which caused Zions some headaches in the past year, appears to be stabilizing.

Analysts expect Zions' per-share profits to surge 22% to $2.44 in 2017, faster growth than any other company in its industry, which is projected to grow an average of 10%. Investors are paying up for that growth, with Zion shares trading at 17 times estimated profits, in line with its industry average. But the stock earns a decent Value score of 71, and its price/book ratio of 1.2 is below its peer-group average of 1.3. Zions, yielding 0.8%, is a Focus List Buy and a Long-Term Buy.

BANKING ON FINANCIALS
Return
Since
Nov. 8
Election
(%)
------ Quadrix Scores ------
--- Est. Current Year ---
------ Est. Next Year ------
Company (Price; Ticker)
Value
Perfor-
mance
Overall
EPS
($)
Growth
(%)
P/E
EPS
($)
Growth
(%)
P/E
Industry
Ameris Bancorp
($44; ABCB)
21
60
73
89
2.59
13
17
3.17
22
14
Regional banks
Charter Financial
($19; CHFN)
47
85
89
99
1.16
81
16
1.14
(2)
17
Thrifts &
mortgages
Citizens Financial
($34; CFG)
28
79
77
98
2.28
18
15
2.69
18
13
Regional banks
Evercore ($77; EVR)
38
73
88
99
4.78
11
16
5.28
10
15
Investment
banking
Independent Bank
($61; IBTX)
27
57
85
94
3.55
17
17
4.30
21
14
Regional banks
J.P. Morgan Chase
($88; JPM)
27
73
79
81
6.60
9
13
7.48
13
12
Diversified banks
Primerica ($81; PRI)
46
63
92
97
5.23
15
15
5.81
11
14
Life & health
insurance
Synchrony Financial
($34; SYF)
18
94
46
89
3.04
12
11
3.37
11
10
Consumer
finance
Zions Bancorp
($41; ZION)
28
71
70
91
2.44
22
17
2.91
19
14
Regional banks
Notes: Quadrix scores are percentile ranks, with 100 the best. Ā  Upside stocks in bold.

 


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