As The Market Collapses – Think… Who Makes Money All The Time: Banks
The best “blue chip” value in the market today can arguably be found in the biggest American banks.
These companies are returning an incredible amount of capital to shareholders. We are talking about DOUBLE-DIGIT shareholder yields here.
Plus, some very smart financial sector investors believe that balance sheets of the big banks are perhaps safer than they have ever been. And as the market temporarily collapses this week due to coronavirus concerns… safe is good!
In a market where most large cap stocks are looking very pricey the big banks may be the rare exception.
The Numbers Make A Very Compelling Investment Case
The banks I’m referring to are the big boys. Wells Fargo, Bank of America, Citigroup, JP Morgan…..the 800 pound gorillas of the industry. Companies with balance sheets that have total assets that are in the trillions of dollars.
Literally — the balance sheets of these behemoths are larger than many countries.
Personally, I find the banking business boring. And I’m not wrong, because the banking business should be boring. When banking gets exciting — it isn’t exciting for good reasons.
Right now the banking business is definitely boring. Slow, steady. Not much going on.
What isn’t boring is how much money the big American banks are paying out to their shareholders through dividends and share repurchases.
Have a look at the table below which compares buybacks + dividends against the current market caps of the four big banks.
Wowzers! Double digit yields from all of them (JP Morgan is a smidge under). Three of them are well into the double digits.
To be clear, the projected buyback levels are what the companies have approved for 2019. Through the first three quarters they are all on track to meet those levels.
Dividends and share repurchases are both returns of capital to shareholders. The money could be allocated to either, the Board of Directors of a company decides.
Think what investor interest Wells Fargo would generate if all of that buyback money was being returned to shareholders via a dividend? That would mean that one of the world’s dominant banking franchises had a dividend yield of 14%!
Normally you would expect a dividend yield like that to come from an MLP, REIT or from a company where a dividend cut was surely coming.
People would be buying these stocks if all of that cash going into share repurchases went to the dividend instead. But…..it is far better for long-term shareholders for these banks to buy back shares at these current undervalued stock prices.
Each of the big banks is going to retire roughly 10% of their outstanding shares in 2019……..for companies of this size that is crazy! And it is very accretive on a per share basis.
So many publicly traded corporations don’t use their buybacks appropriately. These banks are doing the right thing and buying back shares by the bucket load when the valuation of their stocks are cheap.
The Average Investor Is Always Fighting Yesterday’s Battle
So what gives? How can such high profile businesses be so cheap?
A couple of very experienced financial sector investors believe these discounted valuations can still be tied back to the 2008/2009 Financial Crisis……and the fact that most investors are still afraid of the banking sector.
These guys believe that as per usual, investors are afraid of the wrong thing at the wrong time. Investors are afraid of the big banks exactly when they should be very interested.
Chris Davis, son of the legendary investor Shelby Davis and third generation manager of the Clipper Fund now has 49% of his fund invested in the financial sector because of the values he sees. Just profiled in Barron’s magazine, Davis believes that investors are still scared of banks…..pointing to the fact that it took until the 1950s for investors to get over their Depression era concerns about the sector. (1)
Barron’s also noted that joining Davis with this bullish view on the big banks is none other than Steve Eisman — the man made famous in the movie The Big Short (where he was played by Steve Carrell) for not just hating the big banks, but also making huge dollars by shorting them into the crisis.
Image source: YouTube
Eisman has mentioned in several television interviews that U.S. banks are safer than they have been in his professional career…..and with those double digit shareholder yields the numbers show that they are also cheap.
Safe and cheap.
Perhaps it should be no surprise then that Warren Buffett has an absurd $60 billion invested in three of these four big banks. That is a full third of the portfolio that he has spent his entire life building and he has put it into just three companies in the same sector. (2) Worth noting…
You aren’t going to double your money in a year owning these companies. I can’t help but think though that you will do very well relative to the market over the next five years by owning them.
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Sources:
2) https://whalewisdom.com/filer/berkshire-hathaway-inc#tabholdings_tab_link
3) https://www.sec.gov/ix?doc=/Archives/edgar/data/70858/000007085819000057/bac-930201910xq.htm
4) https://www.sec.gov/ix?doc=/Archives/edgar/data/72971/000007297119000406/wfc-09302019x10q.htm
5) https://www.sec.gov/ix?doc=/Archives/edgar/data/19617/000001961719000232/corpq32019.htm
6) https://www.sec.gov/ix?doc=/Archives/edgar/data/831001/000083100119000105/c-9302019x10q.htm
This article was written by Keith Schaefer, Editor/Publisher. We did not receive compensation for this article, and we have no business relationship with any company whose stock is ...
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