Financial Sector: 2 Dividend Stocks To Buy, 3 To Avoid

by: Vatalyst

Conventional wisdom provides that financial companies will continue to report weak earnings. I disagree, in part. In this article I will analyze five financial companies that can sustain their dividends and earnings power. Two in particular, Hudson City and Hartford Financial, offer compelling valuations. Comerica, Federated Investors and Tower Group could be opportunities but I suggest a lower entry point.

First in line is Hudson City Bancorp (NASDAQ:HCBK) which has a recent share price of around $7.00 inside its trading range of $5.09-$13.20 and with a $3 billion market cap. Its price earnings to growth ratio of 1.381 year-over-year is decent, but it currently shows a negative earnings per share of -$0.52 for the first three quarters of 2011, hence the deflated stock price.. However several contrarian pundits have been beating the drum that Hudson will break away from the crowd and declare increased earnings for the final quarter of 2011. If so, Hudson could soar as a safe rock in unsettled times. It offers a dividend of $0.32 for a yield of 4.49% which offers a nice cushion.

Hartford Financial Services Group, Inc.(NYSE:HIG) has a market cap of $7 billion with its price near $18 at the lower end of its 52-week trading range of $14.56-$31.08. Earnings per share are a robust $2.26 with the lowest price earnings ratio of this group of only 7.88 which translates into a price earnings to growth ratio of 0.366. Even better, its price to tangible book is a miniscule 0.40. This is a company that had taken a beating throughout 2011 because it missed earnings by a penny in its June 2011 quarter (earning $0.00 instead of an estimated $0.01), and missed by $0.18 in its September fiscal quarter. However it appears the company has turned a corner and shows every sign of being undervalued. Last quarter the company surprised to the upside with $0.69 per share in earnings and current estimates of $0.86 appear modest. Shares provide an annual dividend of $0.40 for a yield of 2.24%.

Comerica Incorporated's (NYSE:CMA) recent price around $29 was within a 52-week trading range of $21.48-$42.47 with a market cap of $5.2 billion. The price earnings ratio is 12.60 off of earnings per share of $2.14. Shares offer a small dividend of $0.40 for a miniscule yield of 0.60%. While the first two companies have looked strong, Comerica has been placed under review by Moody's Corporation for a possible credit downgrade. The concern reportedly is that with the persistently low interest rate environment Comerica will not be able to return to the profitability levels it maintained before the recession. Until Moody's review is over it is a good idea to avoid this stock. I would be a buyer below $25 on a valuation basis.

Federated Investors' (NYSE:FII) recent share price of $17 falls at the lower end of the 52-week trading range of $14.36-$28.57. Its market cap is $1.8 billion while earnings per share are $1.55 and price earnings ratio is at 11.14. Federated pays out a dividend of $0.96 for a juicy yield of 5.56%. While profitable the current low-interest causes problems here just as it does with Comerica. Federated's margins lag its peers, net profit margin is 17.87% for Federated while its peers average 25.11%. So in the current market expect Federated to lag other financial stocks. It will be a bright idea to recheck this company when eventually interest rates do start to rise. I would be a buyer at $15, where the price to earnings ratio would be around 10.

My final stock is Tower Group (NASDAQ:TWGP) which currently lists a stock price around $21, a 52-week trading range of $19.78-$27.86 and its market cap of around $838 million making it the smallest of this group. It also is more thinly traded with only around 200,000 shares of stock changing hands each day. It boasts a price earnings ratio of 12.30 with earnings per share at $1.71. The stock price took a huge hit after the company reported negative quarterly earnings of -$0.36 in August, down from $0.83 in the previous June. Most analysts believe Tower will return to the same earnings level as before, but the market is jittery.

In addition to all the previous information, a blade is hanging over the necks of all of these companies from speculators in short positions. In this aspect Hudson City is the best of a worrisome lot, with almost 17.8 million shares short and which would take more than 3.8 days of normal trading activity to clear. For the others it is worse, with Comerica and Hartford needing almost four days to clear short positions, Federated 5.5 days while Tower Group would need a full two weeks trading days to clear the massive short bets made against its share price. It makes for a risk of intense volatility. If the shorters are right the prices can plunge like a dead walrus from a high cliff on any bad news. But if they are wrong the stocks could take a big jump when the short bettors have to buy to cover their positions.

In the final analysis both Hudson City and Hartford are buy opportunities but of the two, Hartford looks like the clear best. Hudson needs a bit more good news to show it has turned the corner while Hartford already has. Based on Hartford's price earnings ratio of 7.88, and price to tangible book of only 0.40 this was a troubled stock that looks ready to ride higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.