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As everyone is well aware financial service companies have been hit with heavy scrutiny over the past several years. This continued criticism has left a bad taste in the mouths of investors about these companies. This lack of favor is evidenced by the current valuations that many of these companies possess. I believe there are significant profits to be made in this sector over the coming years as we see the end of accommodating Federal Reserve actions and potentially increasing interest rates. As my grandfather always said "be sure to strike while the iron is hot" and I believe these irons are very hot. For the purpose of this article I screened financial service companies and looked for ones that had P/E below 12 and had at least 100% growth in both earnings per share and net income over the last five years.

Wells Fargo & Co (WFC)

WFC was one of the few financial organizations that never really felt the brunt of the economic recession. Solid management allowed it to emerge from the downturn with a significant advantage over many of its peers.

  • Current Metrics

WFC has a current P/E value of 10.8 and pays a dividend yielding 3.1% annually. WFC's current dividend payout ratio is currently only 35% of its total earnings for 2012.

2008 2009 2010 2011 2012
Revenue 34.9B 56.27B 52.8B 49.41B 48.39B
Net Income 2.66B 12.28B 12.36B 15.87B 18.9B
EPS $0.70 $1.75 $2.21 $2.82 $3.36

WFC's earnings per share have increased by 380% since 2008 and its net income increased by 610% over the same time frame. All financial information for WFC was taken from here.

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  • Future Potential

Looking at the growth rate of WFC's EPS and Net Income over the last five years and comparing that with the company's share price growth from $29.33 to $38.40 represents an increase of only 30%; one could logically conclude that WFC has significant share price growth potential. If you compare WFC's current P/E of only 10.8 with a couple of its competitors who are not performing nearly as well - Bank of America (BAC) with a P/E of 30 and Citigroup (C) with a P/E of 17 - you're left to wonder why WFC is not afforded the same level of confidence with arguably a better track record. If we were to only give WFC the S&P historical average P/E of 14 that would value WFC's shares at a current value of $47 based upon 2012 earnings. This represents an increase of 22% over WFC's current share price. I would recommend continued buying of WFC shares below the $47 mark. If you are worried about this stock maybe you should look to the all-knowing Warren Buffett, who has clearly broadcast Berkshire Hathaway's continued purchases of WFC stock.

Capital One Financial Corp (COF)

COF was sheltered from the worst of the economic recession because the majority of COF's asset holdings were centered in the Washington DC, Maryland, and Virginia areas. Due to the high rate of government employees these areas did not suffer asset depreciation as severe as the majority of the country.

  • Current Metrics

COF has a current P/E value of 10.9 and pays a dividend yielding 2.0% annually. COF's current dividend payout ratio is currently only 20% of its total earnings for 2012.

2008 2009 2010 2011 2012
Revenue 11.11B 10.66B 15.35B 14.73 18.29B
Net Income 84.52M 986.62M 3.05B 3.25B 3.72B
EPS ($0.21) $0.74 $6.01 $6.80 $6.16

COF's earnings per share have increased by 730% since 2009 and its net income increased by 280% over the same time frame. This increase is even more impressive considering that COF actually lost money per share in 2008. All financial information for COF was taken from here.

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  • Future Potential

Consider the growth rate of COF's EPS and Net Income over the last five years. Now compare that with the company's share price growth from $52.91 in 2008, to $59.40 in 2013, which represents an increase of only 12%. One could logically surmise that COF has significant share price growth potential. If we were to give COF the benefit of the doubt and apply the historical S&P average P/E of 14 that would value COF's shares at a current value of $86 based upon 2012 earnings. That would represent a 44% increase above the current share price. I would recommend continued buying of COF shares below the $70 mark because although I like COF's recent performance COF needs a longer track record of growth before I would fully value its stock price.

JPMorgan Chase & Co (JPM)

JPM much like WFC emerged from the economic recession in a much better position than when it entered. JPM's superior management allowed it to emerge from the recession as one of the nation's leaders in both traditional and investment banking.

  • Current Metrics

JPM has a current P/E value of 8.7 and pays a dividend yielding 2.4% annually. JPM's current dividend payout ratio is only 23% of its total earnings for 2012.

2008 2009 2010 2011 2012
Revenue 73.02B 66.35B 63.78B 61.29B 56.06B
Net Income 3.7B 11.14B 16.41B 18.2B 20.53B
EPS $0.84 $2.24 $3.96 $4.48 $5.20

JPM's earnings per share have increased by 520% since 2008 and its net income increased by 454% over the same time frame. All financial information for JPM was taken from here.

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  • Future Potential

When you consider the growth rate of JPM's EPS and Net Income over the last five years and then compare that with the company's share price growth from $46.57 in 2008, to $49.14 in 2013, that represents an increase of only 6%; one could logically surmise that JPM has significant share price growth potential. If we were to apply the historical S&P average P/E of 14 to JPM's shares that would value the shares at a current value of $72 based upon 2012 earnings. That would represent a 46% increase above the current share price. I would recommend continued buying of JPM shares below the $62 mark. JPM's significant drop off in revenue is one particular reason that I would limit my purchase to the sub $62 range. Based upon current earnings shares bought below the $62 mark would value the company at a current P/E of 12, still well below its comparable industry competitors of BAC and C as previously stated in the WFC comparison.

AFLAC Inc (AFL)

The insurance industry much like the financial industry suffered severely during the economic collapse. It is impossible to talk financial services without making the inherent link between banks and insurance companies. Banks are one of the insurance industry's largest customers; these two industries therefore have a vested stake in the performance of the other. AFL does not derive a lot of its income from insurance of the financial industry but does have the potential to step in and fill the void left from the collapse of many insurance companies while at the same time is able to learn from the mistakes of its peers. The majority of AFL's revenue comes from Japan. This fact sheltered this company from many of the issues that the insurance industry faced in the U.S. during the economic recession, specifically those surrounding the credit default swap insurance market. Japan has just recently announced an unprecedented monetary easy policy that AFL is set to benefit from due to more favorable currency exchange rates.

  • Current Metrics

AFL has a current P/E value of 8.8 and pays a dividend yielding 2.5% annually. AFL's current dividend-payout ratio is only 23% of its total earnings for 2012.

2008 2009 2010 2011 2012
Revenue 17.31B 19.26B 21.19B 24.32B 26.34B
Net Income 1.25B 1.5B 2.34B 1.96B 2.87B
EPS $2.62 $3.19 $4.95 $4.18 $6.11

AFL's earnings per share have increased by 130% since 2008, and its net income also increased by 130% over the same time frame. All financial information for AFL was taken from here.

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  • Future Potential

AFL is not a direct competitor to any of the three previously mentioned companies. It does however provide a wide array of economic services for consumers and has shown very impressive growth. When you consider the growth rate of AFL's EPS and Net Income over the last five years and then compare that with the company's share price fall from $65.71 in 2008, to $55.37 in 2013, that represents a decrease of 15%. When you consider that AFL has grown its revenue and EPS over this time by the previously stated 130% this stock should be viewed as a current value dividend investment. If we were to apply the historical S&P average P/E of 14 that would value AFL's shares at a current value of $85 based upon 2012 earnings. That would represent a 53% increase above the current share price. I would recommend continued buying of AFL shares below the $66 mark. A $66 target price would merely bring this company back to 2008 valuations and would represent a renewed confidence in the insurance industry.

Summary

I understand that many people have become very leery of investing in the financial sector, and I do not recommend blindly investing in the sector because not all companies are equal. The companies I have outlined above have very impressive growth rates that should catch the eye of dividend-growth investors in particular. All of the companies pay dividends with a yield above 2%. When you couple that fact with the impressive EPS growth and the potential these companies have to significantly increase dividend payouts over the coming years, all of these companies start to look very attractive. Please respond in the comments section below and let me know your opinion of these four companies.

Source: 4 Dividend-Paying Financial Companies With Upside Potential