For a variety of reasons, the financials, and in particular some of the top banks, have struggled this year. In fact, through the end of last week the sector was down a stunning 5.78%. Continued low interest rates and a genuine concern that an avalanche of energy-related loan failures are in the offing have weighed heavily on the sector, and to some of the bearish voices on Wall Street, things are just about ready to get worse.
The fact of the matter is that in research provided by the Federal Deposit Insurance Corporation (FDIC), only eight banks failed in 2015, and that was the fewest in nine years. Clearly there must be some value in the top companies. We screened the financials research universe at Merrill Lynch for stocks that pay a dividend and are rated Buy. We found four top companies for investors to consider now.
Goldman Sachs
This company continues to be the gold standard of Wall Street banks and trades at a low 9.4 times estimated 2016 earnings. Goldman Sachs Group Inc. (NYSE: GS) has a gigantic institutional equity, debt and derivatives business, an ultra high net worth clientele, top investment banking and capital markets expertise. The bank continues to be a dominant force around the world and is one of the most sought after in the world. And it is one of the very few that dictate who can be a client at the firm.
In investment banking, the company has the preeminent client franchise. Goldman Sachs advised on more than $1.5 trillion of announced mergers and acquisitions transactions last year, the highest level the bank has ever recorded. It also has maintained a leading market share over the past 25 years. It maintained a market position when merger and acquisition activity was dominated by technology in 1999, by financials in 2008 and by natural resources in 2014. The bottom line is, regardless of where market strength is in any given year, Goldman Sachs is up to the task.
Goldman Sachs shareholders are paid a 1.66% dividend. The Merrill Lynch Price target for the stock is $185, and the Thomson/First Call consensus price target is $189.42. The stock closed Wednesday at $156.50 per share.
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JPMorgan
This stock trades at a very low 9.65 times estimated 2016 forward earnings. JPMorgan Chase & Co. (NYSE: JPM) 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 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 throughout this year.
Improvement in loan growth, slow but improving 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.
Dimon also recently put his money where his mouth was and was reported to have bought a stunning 500,000 shares of the stock for a massive $26 million. It brings his total holdings in the bank to 6.7 million shares, worth over $360 million.
JPMorgan investors are paid a 2.95% dividend. The Merrill Lynch price target is set at $72, and the consensus price target is $69.29. The shares closed most recently at $59.71.
Morgan Stanley
Morgan Stanley (NYSE: MS) is another one of the white-glove Wall Street firms that continues to show tremendous growth potential, and it is running neck and neck with Goldman Sachs as the bank of choice for high-profile initial public offerings, despite this year’s lack of activity. Trading at a price-to-earnings multiple of 9.5 times estimated 2016 earnings, that seems extremely reasonable given the 2017 expectations for earnings growth of more than 15%. The company also has $510 billion in cash equivalents on its balance sheet, versus $270 billion in total debt.
The company has been one of the more bearish voices on Wall Street recently, suggesting there was a 30% chance of global recession this year. The bearishness could bode well for investors, as you can bet Morgan Stanley is being very careful with its own investments.
Morgan Stanley investors are paid a 2.39% dividend. The Merrill Lynch price objective is $32, and the consensus target price is posted a bit higher at $33.11. Shares ended Wednesday’s trading at $25.07 apiece.
Wells Fargo
This is another stock for investors to look at now for safety, dividends and solid upside potential. 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. It also 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 and overall revenue. The stock also remains a top Warren Buffett holding. In fact, Buffett recently raised his holdings in the bank to 10% on the stock’s weakness.
Wells Fargo shareholders are paid a solid 3.08% dividend. Merrill Lynch has a $57 price target on the stock, and the consensus target is $56.05. Shares closed Wednesday at $48.65.
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These top bank stocks provide very solid total return potential. More conservative accounts looking to add new positions would be well served buying any of these for the rest of 2016 and beyond.
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