We all know now that the Federal Reserve has given at least 11 big banks permission to hike dividends and otherwise spend cash on shareholders. But with some share prices in the sector ramped up on both dividend and general recovery speculation, investing in that entire list isn’t a good idea.
YCharts Pro tells us which of these well-capitalized banks have undervalued shares. Of the 11 winners in the Fed review, YCharts Pro pegs the following five as the best bargains.
Of all the big banks, American Express Company (NYSE:AXP) gets the highest scores on the 20 relative and fundamental checks in the YCharts program. Among its strengths is an unusually high return on equity, even for an institution with a large credit card operation.
PNC Financial Services Group (NYSE:PNC) recently reported strong 2010 underlying earnings as its provisions for loan losses went way down. The company says its loan portfolio is growing and retail customers are returning. The board will consider a dividend increase at its April 7 meeting.
The share price, which is about the same as the bank’s book value per share, is quite cheap for a bank that’s had two years of positive earnings.
A bonus: PNC investors get exposure to two good companies for the price of one. PNC holds about a 20% stake in major money manager BlackRock (NYSE:BLK), which YCharts Pro considers just as attractive as PNC.
With the Fed review finished, JP Morgan Chase (NYSE:JPM) immediately announced a 400% increase in its dividend on Friday. JP Morgan, which has a market cap of $179 billion, also announced $8 billion in share buybacks this year and $7 billion more later.
Like PNC, Chase shares trade at about book value, making them cheap. YCharts Pro also likes these shares largely because of a strong balance sheet and earnings that are going steadily in the right direction.
Wells Fargo (NYSE:WFC) reported record annual revenues and profits earlier this year, laying down more proof that its once-questionable acquisition of Wachovia Bank in the middle of the banking crisis was a smart move. Increasing income from its home mortgage business also helped, despite the lingering problems in the housing market. The company believes its profit margins will climb higher as it cuts more costs at Wachovia.
On Friday, Wells announced a quarterly dividend of 12 cents per share, up from 5 cents. That will boost its current yield from about 0.6% to 1.5%. Better yet, the company authorized a share buyback of up to about $6.4 billion. Wells Fargo’s market capis $166.23 billion.
The Bank of New York Mellon Corp. (NYSE:BK) has seen sharp rises in fee revenues and assets under management recently. This has helped both the company’s overall revenue picture and its profit margins.
The Fed approved the company’s proposal for dividend hikes and share repurchases in the second quarter of 2011, but the company has not divulged the specifics of these plans. Its share price now is cheap at barely one times book value.
For investors, the best part about the Fed’s list was the vote of confidence it gave to these companies’ balance sheets. It means the Fed believes these banks are generating more than enough cash to cover debt and problem loans, and still be generous to shareholders. It’s a rare reassurance that shouldn’t be wasted, as long as the price is right.