In the six years since S&P 500 hit an ominous intraday low of 666.79, virtually every major sector has rallied, and some have gotten way ahead of themselves in terms of current valuations. A new research report from Deutsche Bank points out that the banks are the last cheap stocks left from the financial crisis. In fact, they still trade at a big discount to historical valuation and the current S&P 500 valuation.
We screened the Deutsche Bank list of stocks rated Buy and focused on four of the large-cap stocks that pay dividends and are very liquid: Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), JPMorgan Chase & Co. (NYSE: JPM) and SunTrust Banks Inc. (NYSE: STI).
Bank of America
Bank of America trades at an incredibly low 11 times 2015 estimated earnings. The company has continued a methodical march back to financial health and is a ubiquitous presence in the United States, providing various banking and financial products and services for individual consumers, small and middle market businesses, institutional investors, corporations and governments in the United States and internationally. It operates 5,100 banking centers, with 16,300 ATMs, as well as call centers and online and mobile banking platforms.
The Merrill Lynch brokerage continues to be one of the bank’s best assets, and it has contributed heavily to earnings growth. With a continued bull market a solid possibility, the brokerage should continue to be a solid contributor to the top and bottom lines.
Bank of America investors are paid a 1.3% dividend. The Deutsche Bank price target for the stock is $19. The Thomson/First Call consensus price target is at $18.45. The stock closed Monday at $15.52 a share.
Citigroup is also very cheap, trading at just 10.2 times estimated 2015 earnings. The stock got hit hard after missing first-quarter earnings estimates, and it may be a perfect large cap stock to buy for a rebound. Many on Wall Street were also thinking there was a reasonably good chance that the bank would not pass the recent Federal Reserve stress tests, which it did with flying colors. While the stock has bounced sharply off the lows printed in early February, it still looks like a compelling buy here, especially with a dividend increase in the mix and a recent dip in the price.
Numerous Wall Street analysts cite the fact that Citigroup will be a leader in buyback payouts to shareholders. Combined with the bank’s strong domestic and international business, and a better overall economy, plus the headline risk removed, headwinds have diminished.
Citigroup shareholders are currently paid a miniscule 0.1% dividend, which will increase. The Deutsche Bank price target is $56, and the consensus figure is higher at $61.98. Shares closed Monday at $51.64.
This stock trades at a spectacular 10.5 times estimates 2015 earnings. The company, like most of the top money center banks, is expected to benefit from commercial loan growth and an upturn in capital spending. Wall Street analysts agree that the stock seems attractively valued on 2015 estimated price to earnings and a very solid price-to-book value. Some on Wall Street have cautioned that last year’s divestiture of the physical commodities business could provide an earnings headwind this year.
Improvement in loan growth, terrific equity capital markets, and a steady increase in deposits will be a solid plus. Trading at a discount to many of the large cap banks on 2015 earnings estimates helps upside potential as well.
J.P. Morgan investors are paid a respectable 2.61% dividend. The Deutsche Bank price objective is $66, and the consensus price target is $68.86. The stock closed most recently at $60.96 a share.
This one is more of a super-regional bank, and it does trade at a somewhat richer 12.7 times 2015 estimated earnings. The bank boasts total assets as of the end of 2014 of $190.3 billion and total deposits of $140.6 billion. Through its flagship subsidiary, SunTrust Bank, the company operates an extensive branch and ATM network throughout the high-growth Southeast and Mid-Atlantic states and a full array of technology-based, 24-hour delivery channels. The company also serves clients in selected markets nationally. Its primary businesses include deposit, credit, trust and investment services.
The brokerage arm has also become a stronger Wall Street player and has started to make solid inroads into the equity capital markets and have a bigger research presence.
SunTrust investors are paid a solid 2% dividend. The Deutsche Bank price target is $46, while the consensus is posted lower at $44.06. The stock closed Monday at $41.13.
With the overall market trading at close to 18 times 2015 earnings, it is pretty easy to see the larger discount the banks trade to at those levels. According to the research report, before the 2008 crisis S&P 500 banks paid out 35% to 40% of earnings as dividends, versus only 27% last year. The Deutsche Bank team expects the payouts to climb to 30% in 2015, 35% in 2016 and 40% in 2017. As we have always said, everyone seems to love dividends — particularly rising dividends.