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5 Financial Stocks Ready for Bigger Dividends - views
BALTIMORE (Stockpickr) -- In the past few years, financial stocks have been like poison for income investors. No other sector so brutally slashed at dividends when the financial crisis hit in 2008 -- and few have kept their payouts so low in the years since.
So why bother looking at them now?
To be fair, there were some extra factors pressuring dividend payouts. After the crash, banks’ dividends became the business of the Treasury, which gets to regulate who can pay dividends and how much they can pay. And beyond bank holding company status, heightened capital requirements are another overhead pressure on dividend payouts.
But not all financial sector stocks are created equal.
Forget about the pure-play banks for a second. Right now, there are a handful of financial stocks are getting ready to hike their dividend payouts to investors. Today, we’ll take a look at five financial sector stocks that are likely to increase their dividends in the next quarter.
So how do we spot dividend increases in the future? For our purposes, our "crystal ball" is composed of a few factors: namely a solid balance sheet, a low payout ratio and a history of dividend hikes. While those items don't guarantee dividend announcements in the next month or two, they do dramatically increase the odds that management will hike their cash payouts, especially as investors start to get antsy about stock performance in 2012.
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Without further ado, here’s a look at five financial sector stocks that could be about to increase their dividend payments in the next quarter.
Diversified financial services firm Prudential Financial (PRU) is up first. The $21 billion firm has businesses ranging from insurance to annuities, retirement and investment management, a combination of one-time and recurring fee-based businesses that have helped PRU achieve stair-step revenue growth, in spite of 2008.
Prudential paid out an annual dividend of $1.45 last year. Investors should expect that payout to increase in 2012.
Prudential is a major player in the insurance industry, a business where size doesn’t matter much. After all, insurance offerings have become more commoditized thanks to an increasingly data-hungry and efficient insurance market. But size does allow Prudential to make deals and underwrite coverage that smaller peers can’t touch.
Meanwhile, more significant growth is coming from overseas (and to a lesser extent from fee-based businesses). Japan currently makes up around half of Prudential’s annual profits. As insurance markets in other parts of Asia mature, risks should come down enough to allow Prudential to expand its reach even more.
The firm’s 3.18% dividend yield is hefty, but its payout ratio is only around 20%. There’s ample room for a dividend hike right now.
Prudential shows up on a list of 5 Buy-Rated Insurance Stocks for Long-Term Investors.
The sole bank on our list of possible dividend hikes is Credicorp (BAP), the $10 billion Peruvian banking stock. Credicorp is the largest financial firm in Peru, and as a result, it’s got significant exposure to commercial lending and leasing activities -- effectively making it a way to get exposure to the Peruvian economy.
Beyond Credicorp’s 3 million traditional banking customers, the firm owns subsidiaries that sell insurance, manage pension funds, and provide investment banking services to Latin American clients. That’s proven to be a profitable place to be in the last several years. Although Latin American economies were getting more attention from investors in 2007, before the credit crisis hit in earnest, Peru is only now starting to get attention for its economic engine -- and Credicorp has seen its profitability double since 2008 as a result.
Currently, the firm pays out a 1.8% dividend yield, the result of last year’s $2.30 annual dividend payout. BAP has a long history of dividend hikes, and even though exposure to the Peruvian nuevo sol adds some risk to the Credicorp payout, I’d expect this year to be no different.
As of the most recently reported quarter, Credicorp was one of Maverick Capital's top holdings.
Mid-cap property-casualty insurer Cincinnati Financial (CINF) announced a new dividend payout at the start of this month, shelling out 40.5 cents this quarter to investors on July 16. The firm has been paying out its quarterly 40.5 cent dividend since 2009. But for a number of reasons, I think that this is CINF’s last payout at that rate.
Unlike bigger insurers with armies of employee-agents, Cincinnati Financial caters primarily to smaller commercial clients through a network of independent agents. As a result, the firm is able to make the most of personal relationships that agents have built.
That’s the main reason why agents are at the center of the firm’s expansion plan -- keep your agents happy and sales will follow. That mantra has played out incredibly well in the last few years; at present, Cincinnati Financial provides the lion’s share of insurance coverage for most of those independent agencies.
The firm’s underwriting standards are high, and that keeps risks low -- a welcome attribute for any investor’s insurance portfolio. It also keeps earnings consistent enough to justify a hefty dividend yield: 4.4%. Shares of this stock have been on a tear since the start of 2012, climbing more than 20%.
Now could be a good time to ride that momentum ahead of a dividend hike.
The biggest name on today’s list of possible dividend hikers from the financial sector is Metlife (MET), a $30 billion insurer that ranks as the biggest insurance firm in the country by assets. I said earlier that Credicorp was the only bank on the list; strictly, that’s not exactly true. Metlife became a bank holding company during the financial crisis in order to gain access to cheap, liquid credit and keep its head above water.
While the move worked, bank holding status puts MET at an operational disadvantage to its peers. Going back to a conventional insurer should improve MET’s profitability -- and give it more freedom from the Treasury department in setting its dividend payouts.
So Metlife’s been doing just that. The firm has been selling off its banking assets for the past few years, decreasing its exposure to Europe, and working on gaining approval from regulators. Even though MET is dealing with delays in getting the change approved, investors are expecting it to happen sometime this year. When it does, I’d expect MET’s 2.5% dividend payout to ratchet higher.
The firm has been paying that 74 cent annual dividend since 2007, a period when MET’s top and bottom line have climbed significantly. It’s time for a dividend hike.
HCC Insurance Holdings
The last name on today’s list is -- surprise, surprise -- another insurance company.
HCC Insurance Holdings (HCC) is having a strong showing this year, up more than 10% since the start of January, vs. gains of less than half that for the S&P 500. The firm is a leader in smaller insurance markets where competition is less. That skirts the commoditization woes that most other insurers face, even if it makes underwriting profits a bit less predictable in the short-term. Longer-term, it means that underwriting profits are much bigger than those of firms that focus on broad-line insurance where risks are overly-quantified and opportunities are arbitraged away.
HCC has paid a 15.5 cent dividend for the past three quarters (with a fourth slated for payment on July 16), and the firm looks due for a bigger payout. Currently just over 20% of profits get pushed through to investors -- I’m expecting a hike in the next quarter on HCC’s 2% yield.
To see these dividend plays in action, check out the Potential Financial Sector Dividend Stocks portfolio on Stockpickr.
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-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.