A Case For Financials: Back To The Long Run

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Includes: JPM, USB, WFC
by: Harvey Malovich

Let's continue with the theme of the previous posts where we discussed the impact of re-investing a growing dividend over the long-run. Recall that we found not only above average returns in consumer staples and health care, but we also found low volatility. For this article I'd like to take a closer look at the financials and show that we have some of the same total return characteristics as staples and health care. Despite higher volatility in the financials, long-run total returns in this sector make a compelling case for either continuing or initiating a position.

From the table below, have a look at the 25 year total returns for the following: JP Morgan (NYSE:JPM) 11.3%, US Bancorp (NYSE:USB) 11.2%, and Wells Fargo (NYSE:WFC) 16.2%. Corresponding betas are, respectively, 1.66 for JP Morgan, 0.89 for US Bancorp, and 1.17 for Wells Fargo.

 

 

Company Ticker Recent Dividend($) Yield(%) 3 Months(%) 12 Months(%) 3 Year(%) 5 Year(%) 10 Year(%) 20 Year(%) 25 Year(%) Beta
JP Morgan JPM 45 1.20 2.6 8.1 29.6 2.7 2.8 8.5 9.5 11.3 1.66
US Bancorp USB 32 0.78 2.3 -5.8 18.7 13.7 2.9 7.6 11.1 11.2 0.89
Wells Fargo WFC 34 0.88 2.5 -0.9 23.5 9.6 5.6 6.3 12.5 16.2 1.17
Click to enlarge

Let's contrast this with the 25 year total returns of some selected staples stocks:

 

 

Company Ticker Recent Dividend($) Yield(%) 3 Months(%) 12 Months(%) 3 Year(%) 5 Year(%) 10 Year(%) 20 Year(%) 25 Year(%) Beta
Colgate Palmolive CL 106 2.48 2.3 -2.5 17.7 10.8 8.8 9.2 13.8 16.8 0.33
Kimberly Clark KMB 84 2.96 3.4 -1.4 19.7 14.1 8.4 9.8 9.5 13.1 0.07
Coca Cola KO 37 1.02 2.7 -4.9 6.3 11.5 6.6 7.8 8.5 13.5 0.39
Proctor & Gamble PG 68 2.25 3.3 -1.4 5.0 6.9 1.7 7.1 10.9 13.2 0.23
Philip Morris PM 86 3.40 3.9 -6.8 10.6 24.3 N/A N/A N/A N/A 0.90
Click to enlarge

And some selected health care stocks:

 

 

Company Ticker Recent Dividend($) Yield(%) 3 Months(%) 12 Months(%) 3 Year(%) 5 Year(%) 10 Year(%) 20 Year(%) 25 Year(%) Beta
Abbot Labs ABT 33 0.56 1.7 -4.2 19.4 10.1 6.6 8.7 10.5 12.9 0.44
Johnson & Johnson JNJ 71 2.44 3.4 2.3 10.4 6.4 4.7 5.2 11.4 13.6 0.44
Merck MRK 41 1.72 4.1 -7.5 11.4 8.1 -2.2 1.1 6.8 9.6 0.29
Novartis NVS 64 2.48 3.9 2.6 13.7 10.8 7.1 8.3 N/A N/A 0.47
Pfizer PFE 25 0.96 3.7 1.0 18.7 14.3 6.7 1.6 10.3 13.7 0.66
Click to enlarge

Long-run returns for the financials haven't exactly been what they were for staples and health care over the last several years. As difficult as the last four and half years have been, however, we may be finally seeing some daylight. A number of recent events and data are pointing towards positive fundamentals that are either here already or soon to be. Consider some of the following:

1) A consensus is developing around the perceived end of the housing bust. A return to normalized housing starts, re-sales, and lending is more conceivable today than at any time since 2008.

2) Litigation against the banks appears to be nearing an end-game. Recent settlements by Bank of America and others portend well for this trend.

3) The reserve guidelines for Basel III will not be as stringent as initially thought. Apparently, some of the intense lobbying that the big lenders have been doing has paid off. As a result, we can expect higher earnings sooner.

4) Dividend growth and buybacks are on their way back. There's been more public talk of late about the Fed lightening its opposition to returning profits to owners. In a recent research note, UBS expects Wells Fargo to both boost their dividend and announce larger buybacks. We can expect more to come from other banks as well.

If we believe (or at least try to believe) that the last five years have been an aberration or a black swan event, then we can expect financials to start to deliver what have historically been outstanding total returns - the type of returns that staples and health care have shown us. Given improving fundamentals of late, this wouldn't be an unreasonable expectation.

For information and comparison purposes, I've also included below the complete table for the longrundata.com Model Portfolio. The source for all data here is longrundata.com.

 

 

  End of Quarter Report, December 31, 2012            
  Longrundata Model Portfolio, Total Returns as of December 31, 2012        
                         
Company Ticker Recent Dividend($) Yield(%) 3 Months(%) 12 Months(%) 3 Year(%) 5 Year(%) 10 Year(%) 20 Year(%) 25 Year(%) Beta
                         
Colgate Palmolive CL 106 2.48 2.3 -2.5 17.7 10.8 8.8 9.2 13.8 16.8 0.33
Kimberly Clark KMB 84 2.96 3.4 -1.4 19.7 14.1 8.4 9.8 9.5 13.1 0.07
Coca Cola KO 37 1.02 2.7 -4.9 6.3 11.5 6.6 7.8 8.5 13.5 0.39
Proctor & Gamble PG 68 2.25 3.3 -1.4 5.0 6.9 1.7 7.1 10.9 13.2 0.23
Philip Morris PM 86 3.40 3.9 -6.8 10.6 24.3 N/A N/A N/A N/A 0.90
                         
Staples Portfolio Average N/A N/A N/A 3.1 -3.4 11.9 13.5 6.4 8.5 10.7 14.2 0.38
Staples SPDR XLP 35 N/A 2.7 -2.1 10.9 12.4 6.9 7.8 N/A N/A N/A
S & P 500 SPDR SPY 145 N/A 2.0 -0.6 14.2 10.2 1.8 6.6 8.1 N/A N/A
                         
                         
Abbot Labs ABT 33 0.56 1.7 -4.2 19.4 10.1 6.6 8.7 10.5 12.9 0.44
Johnson & Johnson JNJ 71 2.44 3.4 2.3 10.4 6.4 4.7 5.2 11.4 13.6 0.44
Merck MRK 41 1.72 4.1 -7.5 11.4 8.1 -2.2 1.1 6.8 9.6 0.29
Novartis NVS 64 2.48 3.9 2.6 13.7 10.8 7.1 8.3 N/A N/A 0.47
Pfizer PFE 25 0.96 3.7 1.0 18.7 14.3 6.7 1.6 10.3 13.7 0.66
                         
Health Care Portfolio Average N/A N/A N/A 3.4 -1.2 14.7 9.9 4.6 5.0 9.8 12.5 0.46
Health Care SPDR XLV 40 N/A 1.9 -0.6 15.9 10.1 4.5 5.4 N/A N/A N/A
S & P 500 SPDR SPY 145 N/A 2.0 -0.6 14.2 10.2 1.8 6.6 8.1 N/A N/A
                         
                         
General Electric GE 21 0.76 3.6 -6.4 18.3 14.4 -6.9 1.4 8.4 9.9 1.38
Illinois Tool Works ITW 62 1.52 2.4 2.8 30.1 10.7 6.1 8.3 12.8 13.8 1.31
3M MMM 95 2.36 2.5 0.1 14.2 6.5 5.2 6.4 9.7 10.2 1.03
United Technologies UTX 84 2.14 2.5 5.3 12.8 7.2 4.2 12.2 16.4 15.1 1.12
Exxon Mobil XOM 87 2.28 2.6 -4.8 3.21 10.5 0.8 11.8 12.1 12.4 0.87
                         
Industrial Portfolio Average N/A N/A N/A 2.7 -0.6 15.7 9.9 1.9 8.0 11.9 12.3 1.14
Industrial SPDR XLI 38 N/A 2.2 4.0 12.5 12.4 1.7 7.8 N/A N/A N/A
S & P 500 SPDR SPY 145 N/A 2.0 -0.6 14.2 10.2 1.8 6.6 8.1 N/A N/A
                         
                         
Bank of America BAC 12 0.04 0.3 29.7 101.9 -9.1 -20.6 -7.7 2.7 7.2 1.78
Citigroup C 42 0.04 0.1 20.8 40.1 5.2 -32.1 -17.9 2.1 4.8 1.88
JP Morgan JPM 45 1.20 2.6 8.1 29.6 2.7 2.8 8.5 9.5 11.3 1.66
US Bancorp USB 32 0.78 2.3 -5.8 18.7 13.7 2.9 7.6 11.1 11.2 0.89
Wells Fargo WFC 34 0.88 2.5 -0.9 23.5 9.6 5.6 6.3 12.5 16.2 1.17
                         
Financial Portfolio Average N/A N/A N/A 1.6 10.4 42.8 4.4 -8.3 -0.6 7.6 10.1 1.48
Financial SPDR XLF 17 N/A 1.7 5.3 25.2 5.2 -8.4 -1.1 N/A N/A N/A
S & P 500 SPDR SPY 145 N/A 2.0 -0.6 14.2 10.2 1.8 6.6 8.1 N/A N/A
                         
                         
Model Portfolio Average N/A N/A N/A 2.6 1.3 21.2 9.4 1.2 5.2 10.1 12.3 0.87
S & P 500 SPDR SPY 145 N/A 2.0 -0.6 14.2 10.2 1.8 6.6 8.1 N/A N/A
                         
Notes: The author is a direct owner of each company mentioned here.            
  The author is not an owner of SPDR's mentioned here.              
  Three month returns are 90 days, not annualized.              
  Yield' and 'Recent' data may not reflect end of quarter date.            
                         
Source: www.longrundata.com                  
Click to enlarge

Disclosure: I am long JPM, USB, WFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.