Investors have shunned shares of financial companies due to renewed concerns about the health of the U.S. economy. At the same time, large money center banks have seen some downward pressure associated with JPMorgan's (JPM) multi-billion dollar loss on a botched trade in the derivatives market, which exposed the banks' continued engagement in risky practices. Despite all the negative sentiment in the market about many financial services stocks, some financials represent good investments for long-term income investors.
We have selected three dividend-paying stocks in the financial services arena for investors seeking stable income. These stocks have a track record of consistent earnings and dividend growth year after year. On average, they pay a dividend yield of 2.7% on an average payout ratio of 41%. Here is a closer look at each of the three high-quality dividend plays in the financial services industry.
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Wells Fargo & Company (WFC) is a $180-billion U.S.-based financial institution. It is the fourth largest U.S. bank by asset size and one of the world's systemically important financial institutions. This bank has seen strong revenue and EPS growth in recent quarters, driven by strong refinancing volumes amid a decline in mortgage rates to record lows. Given that this bank originates more than a third of all U.S. mortgages, the spurt in refinancing activity has had a positive impact on its financial performance, despite the fact that low interest rates have squeezed interest margins. The bank has lower international exposure than its major competitors. Wells Fargo has a price-to-book value ratio (P/BV) of 1.3, above its peer group's ratio of 0.9, but below its five-year average ratio. The bank's ROE is 12.4%. Its return on invested capital (ROIC) is 5%.
Wells Fargo pays a dividend yield of 2.6% on a payout ratio of 29%. The bank's competitors JPMorgan Chase & Co., Citigroup (C), and Bank of America (BAC) pay dividend yields of 3.2%, 0.1%, and 0.5%, respectively. Based on the forward P/Es, Wells Fargo is trading at a small discount relative to its peer group. At $34.20 a share, the stock is up 39% over the past year. Legendary investor Warren Buffett holds almost $14 billion in the company's stock, according to the second-quarter 13F SEC filing (see Buffett's latest top picks). The stock has been Buffett's investment play for two decades. Also bullish about the stock is billionaire Ken Fisher.
T. Rowe Price (TROW) is a $16-billion asset manager. The company has nearly $542 billion in assets under management. Over the past five years, its EPS and dividends grew at average annual rates of 9.0% and 15%, respectively. Analysts forecast that the company's EPS will expand at an average rate of nearly 13% annually for the next five years. The company has posted a profit every quarter since going public in 1986. According to research firm Lipper, at the end of June 2012, 85% of T. Rowe Price's mutual funds beat the average return posted by competitors over the past five years.
The asset manager has seen its deposits increase even as investors withdrew money from mutual funds in the last quarter. The relative outperformance of its funds and the appeal of retiree-oriented products helped boost its performance in the quarter. This trend is likely to continue, albeit global uncertainty will weigh on the stock and mutual fund performance. T. Rowe Price has a P/BV ratio of 4.3, which is 3 times higher than the ratio for the asset management industry but below the company's five-year average ratio. The company boasts a high ROE and ROIC of 22%.
TROW pays a dividend yield of 2.2% on a payout ratio of 46%. The company's peers BlackRock (BLK), Legg Mason (LM), and AllianceBernstein Holding (AB) pay dividend yields of 3.4%, 1.7%, 6.9%, respectively. Based on the forward P/Es, the stock is trading at a premium relative to its peer group. However, the stock is priced below its own historical P/E average. The shares are changing hands at $62.70 a share, up 22.4% over the past 12 months. Among fund managers, the stock is popular with billionaires Ken Griffin and Ken Fisher.
BlackRock, Inc. is the world's largest asset manager, with a market cap of $32 billion. The company has about $3.56 trillion in total assets under management. Its EPS and dividends grew at average rates of 26.2% and 21.4% per year, respectively, over the past five years. Analysts forecast that the company's EPS will grow at an average annual rate of 12.5% for the next five years. The company beats its peers based on the net profit margin and revenue growth. The stock trades on a P/BV of 1.2, which is below the ratio for its respective industry. The company has an ROE of 9.3% and ROIC of 7.3%. The stock is an appealing growth play, given its EPS growth; a value play, based on a discount in terms of relative valuation; and an income play, given its high dividend yield and growth.
The stock pays a dividend yield of 3.4% on a payout ratio of 48%. Competitors T. Rowe Price, Legg Mason, and State Street Corporation (STT) pay yields of 2.2%, 1.7%, and 2.3%, respectively. On the forward P/E basis, the stock is trading at a discount to the asset management industry. It is also trading at a discount to its five-year average P/E. At $177.3 a share, the stock is up 10% over the past year. Fund managers Jonathon Jacobson (Highfields Capital Management-check out its top holdings) and John Griffin (Blue Ridge Capital-see its major positions) are fans of the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.