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5 Financials Ready to Cut You a Bigger Check - views
BALTIMORE (Stockpickr) -- It's been a pretty tepid year for the financial sector: in the last 12 months, financials have returned 6.75%, only around half the gains that the broad market has turned out over that same period. But that looks like it's changing as 2013 approaches.
Investors don't much like financials right now, and I don't blame them. The combination of prolonged low interest rates and shell shock from how fast and far the financial sector fell in 2008 has kept investors from being completely comfortable seeing financials as the next hot sector -- but believe it or not, financial stocks are strengthening right now.
In spite of the fiscal cliff concerns circling Wall Street, one of the biggest places we're seeing that is in dividends. That's why we're trying to step in front of the next set of financial sector dividend hikes this week.
In other words, these five firms are getting ready to boost dividends; they just don't know it yet.
In the past few months we've had some stellar success in finding future dividend hikes just by zeroing in on a few key factors. Now we'll look at our crystal ball and try to do it again.
For our purposes, that "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 three, they do dramatically increase the odds that management will hike their cash payouts, especially as investors start to get antsy about the New Year.
Without further ado, here's a look at five stocks that could be about to increase their dividend payments in the next quarter.
One of the best examples of the rising relative strength of the financial sector is JPMorgan Chase (JPM). The $163-billion bank has seen its share price rally close to 30% so far in 2012, buoyed by strong fundamental performance spread over the year. It's important to remember that those gains come in spite of some conspicuous negatives such as the bank's multi-billion-dollar trading loss announcement from the spring.
JPMorgan is one of the biggest banks in the world, with more than $2 trillion in assets, and a hand in every corner of the banking business from retail to commercial to investment banking. The firm has been one of the fastest big banks to see its financial wherewithal snap back, and it's used that cash to finance big buybacks of its own deeply discounted shares. That's good policy for JPM -- and a major contributor to the bank's shareholder yield besides just dividends. That said, JPMorgan's size presents some problems. Investors shouldn't ignore the possibility for inconspicuous sinkholes in the firm's mammoth balance sheet; the firm's trading loss is a good example of one of those sinkholes.
Increased regulation means that JPM needs to get the thumbs up from Uncle Sam if it wants to buy shares or pay bigger dividends. While that hurdle does restrict JPM's ability to pay shareholders, the firm has a good track record of getting approval for cutting bigger dividend checks. Right now, JPM pays a 30-cent quarterly dividend for a 2.8% yield. With profits mounting for the firm, a dividend hike looks like a likely outcome in the next quarter.
One of the most attractive banks on the market right now is $59 billion “regional” name U.S. Bancorp (USB). While USB doesn't qualify to be in the big four banks, its scale warrants putting this bank in a category all its own. Based in Minneapolis, U.S. Bancorp operates in 25 states as a conventional retail and commercial bank -- but it's the firm's unconventional approach to revenues that makes it especially attractive right now.
USB has spent the last few years focusing on fee-based revenues rather than the more volatile banking revenues that peers collect. It's done that by building out its burgeoning wealth management, credit card servicing, and trustee businesses, three units that have contributed double-digit growth rates to USB's income statement. Fee-based revenues are generally recurring, and they tend to court stickier customers than traditional banking operations could hope to. That's a knock out combination given the low interest rates that are guaranteed for a while to come.
Where other banks spent cash acquiring more cheap deposits, USB has been acquiring more fee generators instead. Cross-selling opportunities between the firm's banking customers and fee business customers should still have the duel effect of drawing more deposits to its customer accounts. Currently, the firm pays out a 19.5-cent quarterly dividend for a 2.48% yield. I think we'll see that number climb higher next quarter.
130 years after its founding, property-casualty insurer Chubb (CB) has grown to become one of the biggest names in commercial and personal insurance. Size comes with some challenges for insurers, and the tradeoff between attractive business lines and scale is one of them. In the years leading up to the Great Recession, Chubb was more concerned with the latter, building an insurance book rife with boring, low margin policies. But in the years since, that's changed.
Margins have become a key consideration for Chubb in recent years, with the firm leveraging its scale to write more bespoke policies for more unique situations like those of high net worth clients or corporate executives seeking liability coverage. In an industry that's become extremely commoditized in the last two decades, Chubb's lines give it much deeper underwriting margins. And while more traditional insurers are forced to match prices and underwrite in volume, Chubb is in an enviable position since it's able to walk away from business based on price.
Financially, Chubb's balance sheet leverage is reasonable and the firm has ample wherewithal to handle any unexpected challenges. While Hurricane Sandy won't be a cheap event for the insurance industry, much of it will be covered through the National Flood Insurance program, which is administered by the government rather than private insurers. That should cut the cost to investors in half.
Chubb currently pays a 41-cent dividend each quarter. With deeper profitability and ample cash generation, that number looks likely to get boosted.
Allstate (ALL) is on the more mainstream side of the insurance spectrum. The $17 billion firm is the second-largest personal lines insurer, focusing on home, auto, and life insurance with a network of 13,000 company agents and an army of independent agents. That network effect is a big deal for Allstate, and the high-touch customer relationship is one feature that the firm markets heavily as an advantage of being an Allstate customer.
Allstate is using technology to give it an advantage over rivals in the hugely commoditized insurance business. One way it's done that is by offering a program that uses a small in-car device that tracks customers' driving habits -- the device lets Allstate make better risk assumptions, and it lets customers cut their insurance costs by up to a third. Better data means that ALL can charge less and pull volume from rivals who don't have the same underwriting prowess.
With a solid balance sheet and ample cash generation Allstate looks like it's in a good position to hike its dividend payout in the near-term. Currently, the firm pays a 22-cent quarterly dividend that works out to a 2.19% yield at current price levels.
Another company that spends a lot of effort measuring consumers' risk is Equifax (EFX). As one of the big three credit ratings bureaus, Equifax is in the business of selling individuals' credit scores to the lenders who are sizing up their prospective loan book. Because those credit risks mean the difference between sizable profits and massive losses for banks, they're willing to pay dearly to get their hands on the data.
Better still, there's little competition among the big three bureaus right now. That's because most financial institutions subscribe to multiple databases in order to get a more complete picture of a borrower's credit. Even though Equifax is much better known for its credit product, the firm has been expanding other data-driven services such as fraud detection, and analytical and database services. The services that EFX provides to financial institutions are relatively low overhead (banks report delinquencies to them, after all), and they generate considerable cash.
International markets have become an increasingly important piece of Equifax's revenue pie, especially given the push towards Western lending standards in emerging markets. As burgeoning middle class populations start demanding cheaper credit, EFX should be first in line to grow its top line substantially. Right now, the firm pays an 18-cent dividend that works out to a 1.56% yield. The firm's cash position has more than doubled in the last year -- I think that we'll likely see some of it go to investors as a bigger payout.
To see these dividend plays in action, check out the at Dividend Stocks for the Week portfolio on Stockpickr.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.