Banking, finance, and taxes

JPMorgan Says Time to Rotate to Dividend-Paying Financials

Lee Jackson

Published: November 13, 2015 9:25 am

Last Updated: January 13, 2020 5:13 pm

While many investors are wincing at the thought of interest rates increases, the fact of the matter is we have been at almost a zero federal funds rate for over seven years. The quantitative easing programs exacerbated the low interest rates and made it even harder for savers that rely on guaranteed dividends from certificates of deposit (CDs) and bank savings. With the solid nonfarm payroll report last Friday, and a huge increase in the jobs added, it’s looking like the Federal Reserve finally will start raising rates, and one sector not complaining, for the most part, is the financials.

A new JPMorgan research report says the time is right to rotate out of consumer discretionary stocks and into the top financials, specifically banks and brokerage firms with a banking arm, as well as insurance companies and top finance companies. We screened the JPMorgan research universe for financials rated Overweight that also pay solid dividends, and were found four that look very attractive now.

PNC Financial Services

This top regional bank has bounced back from the sell-off lows, but it is offering a solid entry point. PNC Financial Services Group Inc. (NYSE: PNC) is one of the largest U.S. diversified financial services organizations providing retail and business banking; residential mortgage banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. With consistent earnings growth and a very positive and growing loan portfolio, it is a premiere super-regional bank stock to own.

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The JPMorgan team points to numerous positives, including the bank implementing huge cost savings plans, which help offset a lackluster third-quarter earnings report. The bank recently highlighted up to $100 million of new savings. Wall Street has always applauded the bank’s outstanding credit/risk management and the limited exposure to the capital markets related areas.

Shareholders receive a very solid 2.25% dividend. The JPMorgan price target for the stock is $99.50, while the Thomson/First Call consensus target is $99.02. Shares closed Thursday at $93.26.
Prudential Financial

Prudential Financial Inc. (NYSE: PRU) has more than $1 trillion of assets under management as of December 31, 2014, with operations located in the United States, Asia, Europe and Latin America. Prudential’s strong and diverse sales force helps individuals and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management.

Prudential reported very solid third-quarter numbers and also recently announced a 21% increase in the quarterly dividend to $0.70 per share. The JPMorgan team is very positive on the company’s strong fundamentals and note that the discount valuation makes the risk/reward profile very attractive. Prudential is also is on track for an estimated $1 billion in buybacks for 2015, and an estimated $1.5 billion for next year.

Prudential shareholders are paid a 3.27% dividend, based on the recent increase. The $105 JPMorgan price target is well above the consensus target of $97.56. Shares closed Thursday at $84.69.

SunTrust Banks

This top regional bank has a fast-rising Wall Street profile as well. SunTrust Banks Inc. (NYSE: STI) serves a broad range of consumer, commercial, corporate and institutional clients. 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. Through its various subsidiaries, the company provides mortgage banking, asset management, securities brokerage and capital market services. As of September 30, 2015, SunTrust had total assets of $187 billion and total deposits of $146 billion.

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The bank posted a very solid third quarter that featured stronger improvements in its efficiency ratio and higher net interest margin numbers. In addition, the SunTrust Robinson Humphrey brokerage arm continues to expand its research and capital markets exposure.

SunTrust shareholders receive a solid 2.25% dividend. The JPMorgan price target is $46, and the consensus target is $45.96. The shares closed Thursday at $42.58.

Wells Fargo

This large cap bank is another stock for value investors to look at now. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage, and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the internet and mobile banking, and has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.

Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line. The analysts feel that could aid a big return in capital to shareholders. The stock remains a top Warren Buffett holding.

The JPMorgan team likes the stability, yield and some asset sensitivity that the big bank offers, and investors looking to add financials to their portfolio could do well buying shares, secure that the bank has little exposure outside of the United States.

Wells Fargo shareholders receive a solid 2.8% dividend. The JPMorgan price target is $59. The consensus target is $58.75, and shares closed Thursday at $55.17.

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The JPMorgan advice to rotate from consumer discretionary to financials makes good sense. The discretionary sector is up well over 12% this year and leads the S&P 500 by a wide margin. Taking some profit and moving to these top financials is most appropriate for growth and income accounts.