The conventional wisdom on Wall Street, if there truly is such a thing, is that rising rates are bad for stocks and can put a damper on the overall market. The fact of the matter is that rates have been too low for too long, and when the Federal Reserve finally raises rates again come December, it could be a positive for the bank stocks, as an increase in rates can actually help the bottom line.
We screened the Merrill Lynch research universe for banks stocks that not only are rated Buy, but also pay solid dividends. As we have maintained for some time, even though the Fed will raise rates in December, and most likely twice in 2017 and 2018, the increases will be very small and, while helping the big banks, they most likely won’t hurt the sluggish economy.
It should be noted three of the four banks will be reporting earnings on Friday, and this is not meant to suggest buying the stocks in front of earnings. These are recommendations for long-term accounts, and the focus is more on how rising rates can be helpful to overall earnings.
This top bank stock is still down over 15% from highs that were posted last summer, and the company also posted very solid second-quarter results. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.
Trading at a very cheap 9.5 times estimated 2016 earnings, this stock looks very reasonable in what is becoming a pricey stock market. A continuing stock buyback program at the bank is a positive. The company’s institutional clients group appeared to be holding its ground last quarter. Citigroup will report third-quarter earnings on Friday, and the market is generally positive over the anticipated results.
Citigroup investors receive a 1.31% dividend. The Merrill Lynch price target for the stock is $55. The Wall Street consensus price objective is $54.09. Shares closed most recently at $48.70.
This stock trades at a very low 10.8 times estimated 2017 forward earnings and could respond well in a rising rate scenario. JPMorgan Chase & Co. (NYSE: JPM) is expected to continue to benefit from commercial loan growth and an upturn in capital spending. Wall Street analysts agree that the stock seems attractively valued on 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 earnings headwind throughout 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 2016 earnings estimates helps upside potential as well. With $2.6 trillion in assets on a worldwide basis, and one of Wall Street’s savviest leaders in Jamie Dimon, the stock is a solid buy for investors.
Earlier this year, Dimon put his money where his mouth was and reportedly bought a stunning 500,000 shares of the stock for a massive $26 million. That brought his total holdings in the bank to 6.7 million shares, worth over $360 million.
JPMorgan investors receive a 2.8% dividend. The $74 Merrill Lynch price target compares with the consensus target of $71.13. The shares closed Wednesday at $68.13.