As the economy continues to show signs of growth, the financials sector has also shown signs of improvement. The Financial Select Sector SPDR Fund (XLF) is up 11% year-to-date, and up 21% in the past 1-year. Given the positive sentiment, we created a list of attractive companies in the sector.
Building the List
To create the list below we researched financial stocks that paid a dividend of at least 2% but not more than 5%. This allowed us to stay away from the high yield space.
Additionally, we looked for companies that appear undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value.
Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. When companies have ratios of levered free cash flow/enterprise value in excess of 10%, it may indicate that the company as a whole is being undervalued.
This ratio gives us the money that the business can use to grow and pay dividends to shareholders. Any possibility of a dividend payout nowadays is looked at positively.
Our final list consisted of 4 financials. We would also like to point out that Coresite Realty reports earnings on April 24th, 2013. Also, The Chubb Corporation reports earnings on April 25th, 2013.
Do you think these stocks look attractive? Use this list as a starting point for your own analysis.
1. Acadia Realty Trust (AKR): Engages primarily in the ownership, acquisition, redevelopment, and management of retail properties in the United States.
- Market cap at $1.49B, most recent closing price at $28.
- Levered free cash flow at $229.00M vs. enterprise value at $2.15B (implies a LFCF/EV ratio at 10.65%).
- Dividend yield at 3%.
- Hedge funds aren't impressed with Acadia: Net institutional purchases in the current quarter at 5.3M shares, which represents about 10.06% of the company's float of 52.67M shares.
2. The Chubb Corporation (CB): Provides property and casualty insurance to businesses and individuals.
- Market cap at $22.65B, most recent closing price at $87.89.
- Levered free cash flow at $5.66B vs. enterprise value at $24.26B (implies a LFCF/EV ratio at 23.33%).
- However Chubb Corp's Price / Free Cash Flow ratio stands at 12.57, much higher than The Travelers Companies, Inc. (P/FCF ratio at 12.56) and ACE Limited (P/FCF ratio at 9.55).
- The dividend yield at 2%.
3. CoreSite Realty Corporation (COR): Operates as real investment trust in the United States including Los Angeles, the San Francisco Bay and Northern Virginia areas, Chicago and New York City.
- Market cap at $714.67M, most recent closing price at $37.18
- Levered free cash flow at $91.79M vs. enterprise value at $787.18M (implies a LFCF/EV ratio at 11.66%).
- Dividend yield at 2.9%.
- The company has reported strong earnings growth over the last year, with EPS growing by 193.35%, higher than competitors like Liberty Property Trust (EPS growth over the last year at 6.94%) and Boston Properties Inc. (EPS growth over the last year at -8.40%).
4. Duff & Phelps Corporation (DUF): Provides independent financial advisory and investment banking services worldwide.
- Market cap at $654.74M, most recent closing price at $15.54.
- Levered free cash flow at $72.78M vs. enterprise value at $615.37M (implies a LFCF/EV ratio at 11.83%).
- Dividend yield at 2.3%.
- The company's earnings growth looks weak, with EPS growing by -2.26% over the last year. However, DUF has a higher than average projected earnings growth rate over the next 5 years (15.0%). This is slightly higher than The Bank of New York Mellon Corporation (projected EPS growth over next 5 years at 12.45%) and State Street Corp. (projected EPS growth over next 5 years at 10.50%).
*FCF data sourced from Yahoo! Finance