I will discuss four financial companies and one media conglomerate which I believe offer good entry point at current prices. The financial crisis of 2008 has left many investors doubtful about the stock market and financial institutions in particular. In my opinion the financial sector, while still recovering, is undervalued, and the five financial companies discussed in this article are companies that will survive and be even stronger than before the crisis.
JPMorgan Chase (JPM) recently traded around $38 per share and has a fifty two week trading range between $27.85 and $48.36 per share. This financial service conglomerate has 3.8 billion shares outstanding, for a market capitalization of $144 billion and pays a quarterly dividend of $0.25 per share for an annual dividend yield of 2.6%. JPMorgan Chase has low price to earnings and price to book value ratios (8.6 and 0.8) compared to the industry's price to earnings and price to book value ratios (13.2 and 1.3). During the financial crisis, JPMorgan Chase purchased two companies at very low prices (Bear Stearns and Washington Mutual), and the value from these two purchases has not been factored in the share price, mostly due to investors' memory of the financial meltdown. Currently, JPMorgan Chase is repurchasing its own shares, and during 2011 alone, it repurchased $9 billion worth of common stock, which will further increase its earnings per share for the remaining common stock. The company is well-diversified geographically and across business lines and, for example, its 2011 earnings were from the following seven lines of businesses: investment banking ($6.8 billion or 36% of net income), card services and auto ($4.5 billion or 24%), commercial banking ($2.4 billion or 13%), retail financial services ($1.7 billion or 9%), asset management ($1.6 billion or 8%), treasury and securities services ($1.2 billion or 6%), and corporate/private equity ($0.8 billion or 4%). Once the economy is on a stronger footing, JPMorgan Chase common stock will become a better performer. Until then, investors are paid a stable dividend.
KeyCorp (KEY) was recently trading at around $8 per share, and had a fifty two week trading range between $5.59 and $9.77 per share. This regional bank has about 1 billion shares outstanding, for a market capitalization of around $8 billion, and pays a quarterly dividend of $0.03 per share for an annual yield of 1.5%. From a valuation perspective, the company is undervalued, as it has a price to book value ratio of 0.8 compared to a price to book value ratio of 1.3 for the industry and 4.4 for the S&P 500. Also, a price to book value ratio of less than one is a clear example of an asset selling below its intrinsic value. KeyCorp's price to earnings ratio is at 9, which is lower than the industry ratio of 13.2 and the S&P 500 price to earnings ratio of 14.2. Shareholders of KeyCorp are rewarded with a stable (and likely rising) dividend, and there is a possibility of significant stock price appreciation as the U.S. economic activity continues to improve and the demand for financial services returns to pre-crisis levels.
From retail banking, I am shifting focus to the insurance industry and MetLife (MET), which recently traded around $38 per share and had a fifty two week price range between $25.61 and $48.72 per share. The company pays an annual dividend of $0.74 per share for an yield of 1.9% and has 1.06 billion shares outstanding for a market capitalization of about $40 billion. MetLife is relatively undervalued, with a price to book value ratio of 0.7 compared to 1.4 for the industry and 4.4 for the S&P 500, while it has above average earnings before interest, tax and depreciation margin of 38% compared to 24%, and 20% for the industry and the S&P 500, respectively. On December 5, 2011 MetLife announced its 2012 guidance, and estimated 2011 results. According to the press release, 2012 operating earnings would grow 7% compared to 2011, and 2011 operating earnings growth would be 32% higher than 2010. This and the undervalued common stock compared to industry, makes MetLife a compelling investment opportunity.
From the financial services, I am moving to another service sector - media and entertainment, with News Corp (NWSA), which trades around $19 per share and had a fifty two week trading range between $13.38 and $19.79. The company has 2.52 billion shares outstanding for a market capitalization of $48 billion and pays a semiannual dividend of $0.095 per share, for an annualized dividend yield of 1%. News Corp is conservatively managed and has long-term debt of $15.5 billion compared to $11.4 billion of cash, and a long-term debt to equity ratio of 0.6. In addition, News Corp is currently undergoing a $5 billion share repurchase program which should be complete by July 2012. For the fiscal year ending on June 30, 2011 the company generated $4.5 billion of cash flow from operations. While News Corp is strong financially, its image suffered in 2011 because of a scandal related to illegal wiretapping in the United Kingdom, which resulted in a hefty fine and caused the company to close one of its major newspapers that was published there. Once the headwinds from this scandal subside, I believe News Corp will continue to outperform the market and the industry in general, as it has a diversified portfolio, a global footprint and valuable assets that the company manages well.
Regions Financial (RF) common stock price is around $5.50 at the time of this writing, nearly halfway between its fifty two week trading range from $2.82 to $8.09. The company pays a $0.01 quarterly dividend per share, for an annual yield of 0.74%, and has 1.26 billion shares outstanding, for a market capitalization of about $7 billion. The company has one of the lowest valuations among its competitors, with a price to book value of 0.54, compared to an average price to book value of 1.3 and 4.4 for the industry and the S&P 500. On January 11, 2012 Regions Financial announced the sale of Morgan Keegan & Co for about $1.2 billion. The sale should help Regions Financial improve its Tier 1 Capital and Tier 1 Common ratios by 13 and 9 basis points, respectively. Regions Financial finished 2011 with $127 billion in assets, and after a few bumpy years, should reward its common shareholders once the economic activity in the sunbelt reaches pre-crisis levels. At $5.50, Regions is a strong buy with limited downside potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.