In the wake of the zero interest rate policy environment in which we live, the thirst for yield means some dividend stocks have been bid up to ridiculous levels. However, not all dividend stocks are overvalued and this article will take a look at three mid-cap financial with great dividends. Two of these companies have reasonable valuations and can be bought today and the third should be added only on a pullback.
Bank of Montreal
Bank of Montreal (NYSE:BMO) is a $40 billion bank that provides wealth management, investment banking and traditional retail banking globally. The 46,000 employee bank was founded in 1817 and operates about 1,600 branches in North America. The stock is trading within a couple of dollars of its 52-week high as of this writing but still sports an impressive 4.7% yield. While this is certainly a respectable yield, the 10% rally in the stock over the past year has caused the current yield to fall below the five-year trailing average of 5.2%.
In addition to the terrific yield, the bank enjoys a very reasonable set of valuation metrics. Return on equity is a strong 13.98% while return on assets could use some work at only 76 basis points. Price/book value is a bit more expensive than I typically like with a bank at 1.48, but in this case, I believe the yield is causing some investors to bid the stock up more than might normally be justified. Still, it isn't as though 1.48 times book is nosebleed territory; it is a bit higher than some of BMO's competitors, though.
On the earnings front, BMO is expected to make $6.08 per share in fiscal 2013, indicating a forward PE of about 9.6. This is quite reasonable for a bank and helps the stock to have a very sensible PEG ratio of 1.0. In addition to a strong 2013, next year is expected to see earnings grow again to $6.40 per share and leave more room for additional dividend increases over the current $2.91 per share payout.
BMO is a terrific banking franchise that has a reasonable valuation and a great dividend yield. In addition, the company has a history of raising its payout and this, along with earnings that are expected to continue to grow, means that BMO shareholders should be handsomely rewarded for their patience. BMO is not a stock you are likely to double your money quickly; rather, it is a stable franchise that grows earnings and dividends quite predictably and can provide terrific current income for investors seeking such a stock.
Manulife Financial Corporation
Manulife (NYSE:MFC) is a $28 billion global financial services firm that provides wealth management, investment banking and insurance products to its clients in North America and Asia. The stock is trading within 3% of its 52-week high as of this writing but still offers a very nice 3.4% yield. While this is certainly a respectable yield, the massive 29% rally in the stock over the past year has caused the current yield to fall below the five year trailing average of 3.9%. However, this is to be expected given the enormous rally.
In addition to a nice yield, the financial services firm enjoys a very reasonable set of valuation metrics. Price to book is only 1.19 so you aren't paying up for the company's asset base. On the earnings front, MFC is expected to make $1.35 per share in 2013, implying a forward PE of about 9.9. This is quite reasonable for just about any company but in particular, one that is growing earnings so quickly. The quick earnings growth helps the stock to have a very sensible PEG ratio of 1.15. In addition to a strong 2013, next year is expected to see earnings grow again to $1.54 per share and leave more room for additional dividend increases over the current $0.52 per share payout if the Board so chooses.
Much of the strong capital gains have likely been seen already in MFC but with the company expected to have an earnings yield of 10% in 2014, moderately higher prices are likely at a minimum. In addition, MFC pays you to wait it out with nearly twice the 10 year Treasury yield and stable, growing earnings that leave room for additional payouts in the future.
Cincinnati Financial Corporation
Cincinnati Financial Corporation (NASDAQ:CINF) is an $8 billion financial services firm that specializes in the property casualty insurance business in the US. The stock recently notched a new high at $49.72 and is trading within two percent of that number as of this writing. The company offers a slightly smaller 3.3% yield but that is following a massive 39% rally in the past year. The five year trailing average yield for the stock is a very considerable 5.2% but CINF is far from that as of right now after the huge rally.
Unlike the other two financials we've profiled here, CINF is a bit on the expensive side right now. The stock has a forward PE of over 21 right now and the PEG ratio is off the charts at nearly nine. Price to book is reasonable at 1.39 and return on equity is respectable at 8.9%. However, these are not numbers that justify such a high multiple.
CINF is expected to earn $2.23 in 2013 but only grow earnings incrementally to $2.27 in 2014. This lack of growth means the stock looks expensive to me at nearly $50 per share. An earnings multiple of 20+ usually means at least 15%+ earnings growth but CINF is barely budging.
CINF does have very strong insider ownership at 9.2% which is great for ensuring management's interests are aligned with shareholders. In addition, the nice dividend has propped up the stock, but it has come too far, too fast for my taste. CINF is a great dividend investor candidate but only after it pulls back. I wouldn't go near it for $50 as I think it is currently overvalued. However, if you get a pullback to $40, which seems like a long way from here, the stock would yield right at 4% and would be a great addition to a dividend investor's portfolio. Given the historical yield the stock has in relation to where it sits now and the company's prospects for growth, dividend investors would do well to wait for a better entry into CINF.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.