Banking, finance, and taxes

The Big Dividend-Paying Banks Have Been Mauled: 4 to Buy Now

Lee Jackson

Published: March 29, 2017 10:00 am

Last Updated: January 12, 2020 1:30 pm

There’s an old saying on Wall Street and it still rings true today: “Stocks go up like an escalator, and down like an elevator.” Boy has that ever been the case for the top banks. While the Trump rally lifted them fast, they had been rising prior, and momentum players started getting involved, so when the sector turned down, it was a nosedive. The Financial Select Sector SPDR Fund (NYSE: XLF) dropped a stunning 10% this month in three short weeks.

So where do they go now? Given that consumer confidence is the highest in 16 years and the Federal Reserve will continue to raise interest rates, the outlook for the sector seems positive. We screened the Merrill Lynch research database for bank stocks rated Buy that pay a solid dividend. We found four that look attractive now.

Citigroup

This top bank is trading at the same level it was in the summer of 2015. 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 10.7 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, and while guidance when they released the quarter in January was conservative and somewhat disappointing, the stock still appears cheap at this level.

Citigroup investors receive a 1.08% dividend. The Merrill Lynch price target for the stock is $64. The Wall Street consensus price objective is $64.11. Shares closed Tuesday at $59.42.

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JPMorgan

This stock trades at a reasonable 13.4 times estimated 2017 forward earnings and could respond good in a rising rate scenario. JPMorgan Chase & Co. (NYSE: JPM) is one of the leading global financial services firms, and one of the largest banking institutions in the United States, with about $2.5 trillion in assets. The company as it is today formed through the merger of retail bank Chase Manhattan and investment bank JPMorgan.

The firm has many operating divisions, including investment and corporate banking, asset management, retail financial services, commercial banking, credit cards and financial transaction services. The company reported strong fourth-quarter results, and the Merrill Lynch feels that the company will continue to be able to take advantage of revenue opportunities while staying on a path of improved efficiency.

Shareholders receive a 2.26% dividend. Merrill Lynch has a $98 price objective, and the consensus target price is $90.78. The shares closed Tuesday at $88.60.

PNC Financial Services

This top regional bank was down almost 10% in March but has started to rebound. PNC Financial Services Group Inc. (NYSE: PNC) is one of the country’s largest diversified financial services organizations. It provides retail and business banking; residential mortgage banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; and wealth management and asset management. With consistent earnings growth and a very positive and growing loan portfolio, the company is a premiere super-regional bank stock to own.

Wall Street analysts point to numerous positives, including the bank implementing huge cost savings plans. The bank is working on up to $100 million of new savings announced last year, and it is also applauded for outstanding credit/risk management and the limited exposure to the capital markets related areas, while focusing on traditional banking. The stock is on Merrill Lynch’s US 1 list, which represents the company’s highest conviction stock ideas.

Shareholders receive a 1.85% dividend. The $132 Merrill Lynch price target compares with the consensus target of $127.81. Shares closed Tuesday at $120.23.

Wells Fargo

This large cap bank 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, and he raised his holdings in the bank to 10% on the stock’s weakness last year.

With the headline risk from the bank’s very bad account scandal pretty much in the rear-view mirror, investors are once again focusing on the core strengths as continued interest rate increases are a big positive.

Shareholders receive a 2.71% dividend. The Merrill Lynch price target is a whopping $65. The consensus target is $58.48, and shares closed on Tuesday at $55.96.

While the big drops appear to be over, with earnings reporting right around the corner, investors may want to buy partial positions and see how the banks report first-quarter numbers.