Many financial stocks have been out of favor with investors for some time. A weak macroeconomic environment, problems with exposures to sovereign debt in Europe, margin compressions due to low interest rates, and trading losses associated with speculative bets have all adversely affected the market for financials. Still, despite all the gloom and doom in the financial arena, several noteworthy investors have pursued a few financial stocks. Some consider that the negativity priced into the financial stocks has created value opportunities for long-term investors. At the same time, there are a number of financial stocks that have bucked the general trend of pessimism and decline.
We take a glance at five popular non-REIT financial stocks. They all have dividend yields of at least 4% and market capitalization in excess of $2 billion.
Federated Investors Inc. (FII) is a $2 billion investment management company, one of the largest mutual fund companies in the United States. It has an attractive dividend yield of 4.5% and a payout ratio of 62%. The company's competitors BlackRock (BLK), AllianceBernstein Holding L.P. (AB), and Janus Capital Group (JNS) pay dividend yields of 3.5%, 8.1%, and 3.2%, respectively. The company has a concentrated funding structure with several large financial companies, including the Bank of New York Mellon, accounting for the lion's share of assets under management. Federated Investors fared well during the subprime mortgage crisis as the company concentrated investments in money market funds. It operates well during times of market volatility when investors favor liquidity and safety of money market funds. The company has fairly liquid balance sheet and a well-diversified product mix. At $21.24 a share, the stock is trading at a forward P/E below that of the asset management industry. Its price-to-book is 3.95 and ROE is 28.5%. Joel Greenblatt is fan of the stock; value investor David Dreman acquired it in the first quarter.
HSBC Holding (HBC) is a global banking and financial services company with a market cap of $173 billion. Once self-proclaimed "the world's local bank," HSBC has been moving away from retail banking and towards its traditional expertise in financing trade between developed and emerging economies. The bank boasts a dividend yield of 4.1% on a payout ratio of 45%. Its peers Barclays (BCS) and Citigroup (C) pay dividend yields of 2.4% and 0.2%, respectively, while Royal Bank of Scotland (RBS) does not pay any regular dividends. Recently, the bank has been explicitly implicated by U.K. Chancellor of the Exchequer in a scandal concerning LIBOR manipulation. Last month, Barclays paid $400 million-plus to settle charges associated with LIBOR manipulation and lost its Chairman and CEO. Investment and commercial banking profits have been driving growth. In the first quarter, the bank reported a loss after revaluing its debts. The bank is trading below book value and boasts a ROE of 9.3%. Billionaire Jim Simons purchased a large stake in the company in the first quarter of 2012.
KKR & Co. LP (KKR) is a private equity and venture capital firm specialized in leveraged buyouts. It sponsors and manages private equity investment funds. It has $59 billion in assets under management. The company seeks to expand operations as alternative asset manager. It pays a dividend yield of 4.5%, but has an extremely high payout ratio based on trailing-twelve-month earnings. The company's rivals Blackstone Group (BX) and Oaktree Capital Group LLC (OAK) pay dividend yields of 3.1% and 6.0%, respectively. Oppenheimer recently upgraded the stock citing the progress the company has made in investment monetization. Analysts have a particularly upbeat forecast for KKR & Co.'s EPS growth. They expect the firm's EPS to grow at an average annual rate of 25% per year for the next five years. However, the current trends are not so encouraging. Last quarter saw the lowest buyout activity in nearly nine years due to the eurozone crisis and global macroeconomic uncertainty. The number of deals was down 25% and the value of deals was lower by 2.2% year-over-year, according to Dealogic. The fundraising activity has also been sluggish. KKR & Co. has a forward P/E of 8.3 times and sells for $12.95, down 17% in a year. John W. Rogers (Ariel Investments-see top holdings) and billionaire Leon Cooperman hold large stakes in the company.
Credit Suisse Group is an international financial services company based in Switzerland. The bank has a market capitalization of $22 billion and is one of the world's largest wealth management firms. It is considered one of the global systemically important financial institutions, according to Financial Stability Board. The bank pays a dividend yield of 4.4% on a payout ratio of 153% of trailing earnings and 56% of free cash flow. Its peers UBS AG (UBS), JPMorgan & Chase Co. (JPM), and Morgan Stanley (MS) pay dividend yields of 0.6%, 3.5%, and 1.4%, respectively. The bank has a price-to-book ratio of 0.62 and a ROE of 1.5%. Its shares are trading at $17.6 a share, down 54% in a year. Similarly to HSBC, Credit Suisse is another global bank under investigation for possibly rigging LIBOR. Last month, Moody's downgraded the bank's rating level by three notches to A2. Billionaires Jim Simons and Ken Griffin as well as value investor David Dreman are investors in the company.
NYSE Euronext (NYX) is a company that operates exchanges, including NYSE, NYSE Amex, and five European bourses that comprise Euronext. Trading in the company's equity markets accounts for a third of the world's cash equities volume. The company pays a high dividend yield of 4.8% on a payout ratio of 57%. Its rivals Nasdaq OMX Group (NDAQ) and CME Group (CME) yield 2.3% and 3.4%, respectively. NYSE Euronext stock has dropped 29% in a year and boasts a low P/E of 11.9 times. However, the company has been struggling with weak transaction volumes and pricing, due to economic weakness, flagging investor confidence, and other factors. The stock has a price-to-book of 1.05, a free cash flow yield of 7%, and a ROE of nearly 8%. Billionaires Ken Griffin and Leon Cooperman are bullish about the stock. In the first quarter, Griffin boosted his stake in the company by 144%.