A 4.3% Dividend And A Large Discount To Tangible Book Value Make Jefferies A Buy

Jun. 29, 2022 11:16 PM ETJefferies Financial Group Inc. (JEF)10 Comments8 Likes
Tim Travis profile picture
Tim Travis
4.98K Followers

Summary

  • Jefferies trades at 63% of book value and 83.6% of tangible book value.
  • The dividend is $.30 in cash quarterly, for a yield of 4.3%.
  • Strong management understands the value of stock buybacks.
Jefferies.

Roman Tiraspolsky/iStock Editorial via Getty Images

I like investing in businesses with strong management, a large margin of safety, and a relatively clear path of producing robust shareholder returns. The morbid bear market of 2022 has created many attractive opportunities for investors willing to take a long-term perspective. Jefferies (NYSE:JEF) is a well-run Investment Bank that has been gaining market share, returning capital to shareholders, and which trades at a large discount to intrinsic value. The macro environment is terrible, but as Warren Buffett says, “you pay a very high price in the stock market for a cheery consensus.” Capital markets will improve, and the bear market will likely end before we actually are out of what seems like a rather inevitable recession. Jefferies will be primed to capitalize on that recovery with a management team that also knows how to take advantage of a discounted stock price via stock buybacks.

History

Jefferies Group has been patiently built over the last 60 years, with CEO Rich Handler joining the company in 1990 and becoming CEO in 2000. Jefferies was averaging $359MM in revenue and $35MM in net income in the 1990s, growing to $6.197B in revenue and $1.261B in net income in the 2020s. Investment Banking net revenues were $9MM in 1990, growing to $4.163B in the TTM ending in Q3 2021, resulting in a 22.1% CAGR. The company has achieved this by focusing on meeting the needs of its clients and investing in people. The company is conservatively financed with strong liquidity and risk management. As of May 31st, 2022, the Leverage ratio is 5.5 and the Tangible gross leverage ratio is 6.6. The company is really focused on increasing the proportion of income that is derived from lower risk and less volatile activities, such as asset management, while exiting its legacy Merchant Banking portfolio over time. Strong management prioritizes returning excess capital to shareholders through dividends and mostly accretive buybacks.

Joint Ventures

In 2004, Jefferies formed a 50/50 joint venture (JFIN) with MassMutual, focusing on arranging leveraged loan transactions and managing a loan portfolio. The JV has arranged $275B of loans since inception and is the manager of 24 term loan and revolver CLOs, with $12B of managed capital. The JV generates attractive fee revenues, while also feeding the Investment Banking franchise. JFIN produced $271MM in pretax income in 2021.

In 2009, Jefferies established a 50/50 joint venture with Berkshire Hathaway (BRK.B) forming Berkadia, which is a full-service commercial mortgage banking firm offering loan financing solutions, investment sales advisory and mortgage servicing. Since 2009 Berkadia has distributed over $736MM in cumulative cash dividends to Jefferies. Berkadia has a $317B servicing portfolio, originated over $32B in new financings in 2021, and brokered $16B in CRE sales transactions in 2021. Berkadia produced $292MM of pre-tax income in 2021.

Jefferies partnered with the Japanese bank SMFG, where it will attain financing to enable it to grow the number of transactions originated by Jefferies, while also increasing its penetration of Japanese corporate clients seeking global advisory services. Since Jefferies has not converted to a bank itself, it does not have access to the low-cost deposits of some of its investment banking peers, so this relationship is helpful to improve the reach of the company.

Pandemic Era Winner

Jefferies was a major beneficiary of the robust capital markets environment that occurred during the pandemic/lockdowns of 2020/2021, posting seven quarters of core business earnings higher than any quarter before 2020. Jefferies is the 6th ranked global M&A advisor, 8th ranked in Cash Equities, and is top ranked in the U.S. in LBO loans. While the environment was beneficial, it is important to note that Jefferies exceeded market growth by strong margins in Investment Banking 16% vs. 28%, Equities 8% vs. 35%, and Fixed Income 14% vs. 37%, from 2018 to 2021. This is seen in improved market share in these key businesses. Jefferies has seen excellent growth in its Leucadia Asset Management business, growing its aggregate NAV-Equivalent AUM from $10B in 2018, to $22B in 2021. This business will continue to grow in importance as the company focuses on enhancing fee revenues. Jefferies still has a nearly $2B Merchant Banking portfolio with large businesses in oil and gas, and real estate, among others. Over the last 9 years, the company has recognized $2.4B in aggregate pre-tax gains from the sale of 11 businesses, with the largest profit of $1.1B coming from National Beef. In 2021, Jefferies generated $7.1B in net revenues, including $4.4B in Investment Banking revenues, and generated $1.7B in net income.

Recent Quarterly Results

On June 27th, Jefferies announced net income of $114MM, or $.45 per share. This was down substantially YoY from $352MM, or $1.30 per share as capital markets were far tighter during this tumultuous bear market. New issue volumes were extremely limited, and the company took some unrealized markdowns in mortgage inventory and leveraged finance commitments. The annualized return on adjusted tangible equity was only 5.8%, down from 19.2%. Investment Banking and Capital Markets revenues of $1.098B and Total Net revenues of $1.369B were down 31% and 30%, respectively. The company repurchased another 8 million shares of common stock for $258MM at an average price of $32.20 per share. As of May 31st, 2022, JEF had 232.3MM shares outstanding and 259.6MM on a fully diluted basis. Book value per share was $44.34 and tangible book value per share was $33.36. Jefferies pays a quarterly cash dividend of $.30 per share, which is good for a 4.3% dividend yield at the recent price of $27.90. The company has repurchased 145.3MM shares of common stock for $3.4B, or an average price of $23.16. In total, the company has returned to shareholder $4.6B, or 46% of shareholders’ equity and 61% of tangible shareholders’ equity on January 1, 2018.

Management pointed to a strong backlog and market position, but the execution will be quite conditional on normalizing economic and market conditions. Companies still need to issue equity and debt and Jefferies has built strong relationships to become a trusted source for that. We could start to see M&A pick up as well in the 2nd half of the year, as stronger companies attempt to consolidate their position and take advantage of cheaper equity prices. I think it is very likely that the economy will be or is already in a recession, and the stock market is pricing in that possibility. Jefferies stock has come down dramatically from its high around $43 last November.

Conclusion

At $27.90, JEF trades at 63% of book value and 83.6% of tangible book value. Using a 10% normalized ROTE puts earnings at around $3.36, which would put the stock at about 8.3x - a very conservative metric for earnings power. With a market cap of just under $6.5B, Jefferies outperformed dramatically in 2021 generating $1.7B in net income, so we are talking about a low multiple on what could be trough earnings in 2022. The balance sheet is in good shape and management absolutely has the opportunity to take advantage of the cheap stock price by buying back stock, which would be highly accretive at current levels. With 4.3% dividend yield, investors are being paid to wait for capital markets and Mr. Market’s mood on the stock to improve. I believe the stock is conservatively worth about $35 a share, which is around where I see tangible book value per share being at the end of the year, with upside beyond.

This article was written by

Tim Travis profile picture
4.98K Followers
Tim Travis is a veteran deep value investor and money manager. Travis has extensive experience in traditional investments such as stocks and bonds, in addition to having a unique methodology of combining options and distressed investing with value investing to generate income, reduce risk, and to add an element of timing. Currently Tim Travis is the founder, Chief Executive Officer, and Chief Investment Officer of T&T Capital Management. T&T Capital Management is a Coto de Caza, California based Registered Investment Advisor that manages accounts for both individual and institutional investors. Travis was born in Laguna Beach, California and became captivated with the value investment philosophy in his early teens through reading books written by Benjamin Graham, and the shareholder letters from Berkshire Hathaway, and the Buffett Partnership L.P. Tim Travis became intrigued by the notion that stocks aren’t just pieces of paper but instead are fractional shares of a business that can be analyzed by comprehensive analysis of the balance sheet, income statement, and statement of cash flows. He majored in Business and Economics at the University of California Santa Barbara, graduating in 2004, and he also had the privilege of studying international economics at the University of Richmond in Florence, Italy. Tim Travis got his feet wet in finance working for both Scottrade and AG Edwards & Sons during his college career. Upon graduation Travis worked at the Vanguard Group in Scottsdale, Arizona. It was there that he learned that most mutual funds underperform their respective indexes, and he became disappointed at the overwhelming diversification in most mutual funds, that really makes most of them function as “closet” index funds. After leaving the Vanguard Group, Travis worked for a small futures and commodities firm in Mission Viejo, California. It was there that Tim developed an adept knowledge of options, particularly the selling of options to take advantage of the higher probabilities involved. It was also during this time in his life that Travis began reading everything he could possibly find on value investing. Some of his role models in the field are Warren Buffett, Martin Whitman, Bruce Berkowitz, Seth Klarman, Peter Lynch, Glenn Greenberg, etc. After working with clients from around the world Travis broke away and started T&T Investment Management L.L.C. At T&T, Travis refined his unique methodology combining value investing, with the selling of options to generate income and reduce risk. T&T experienced explosive growth by partnering with a local commodities firm. After several years Tim Travis realized that without controlling the majority of the company any longer, he didn’t have full control over the company’s strategic direction. Divergent business principles caused Tim Travis to break away and form T&T Capital Management. At TTCM which Tim Travis is the sole owner, he is allowed to offer only the best products and services, at a reasonable price, without conflicts of interest. T&T Capital Management’s goal is build wealth for both individual and institutional investors, and to accomplish these goals Travis as Chief Investment Officer employs his deep value investing techniques. Each account is managed on a day to day, personal basis, and there are no cookie cutter portfolios defined only by one’s age and risk tolerance. Every security is researched and hand selected by Travis and his research team. T&T Capital Management takes pride in first class customer service and research which is regularly communicated to clients for education purposes.
Follow

Disclosure: I/we have a beneficial long position in the shares of JEF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments (10)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.