In spite of the coronavirus crisis, the S&P 500 has rallied 20% in the last 12 months to new all-time highs. But value stocks are much harder to find after the market rally, with the S&P 500 now at a trailing price-to-earnings ratio of 38.4 and with an average dividend yield of just 1.5%.

However, there are still high-yield stocks trading at attractive valuations, such as Lazard (LAZ). Thanks to its recent 15% correction, the stock has become cheaply valued and is currently offering a 4.8% dividend yield. As a result, Lazard has become a deep-value stock.

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Business overview

Lazard is an international investment advisory company, which was founded in 1848. It has two business segments, namely Financial Advisory and Asset Management. The Financial Advisory business includes M&A, debt restructuring, capital raising, and other advisory business. The Asset Management business is about 80% equities and focuses primarily on institutional clients. Lazard generates 60% of its total revenue in Americas, 30% in Europe and Middle East, and 10% in Asia Pacific. Its revenue is almost equally split between its two segments.

Most financial companies incurred a material decrease in their earnings last year due to the coronavirus crisis, which caused a severe global recession and thus exerted great pressure on many companies and individuals. However, this was not the case for Lazard.

In the fourth quarter, Lazard grew its operating revenue by 20% and its adjusted earnings per share by 82% over the prior year’s quarter, from $0.91 to an all-time high of $1.66, thanks to higher assets under management, and high activity in M&A deals and debt restructuring.

Obviously, the company benefited from some aspects of the pandemic, namely the increased need of companies for debt restructuring and the great number of mergers, which resulted from the opportune valuations of some companies and their need to become more efficient via consolidation amid the pandemic. In addition, Lazard benefited from the unprecedented stimulus packages offered by most countries in response to the pandemic and thus it grew its assets under management by 4% in 2020.

Notably, Lazard is engaged in many high-profile financial events, such as the $21 billion acquisition of Immunomedics by Gilead Sciences, the $28.6 billion merger of Fiat Chrysler and Peugeot as well as the debt restructuring of JCPenney.

Growth prospects

Lazard has grown its earnings per share at an 11.4% average annual rate over the last decade. However, all the growth materialized until 2015 while the company has exhibited flat earnings per share in the last five years, with volatile performance throughout this period.

Nevertheless, Lazard currently enjoys strong business momentum thanks to a series of tailwinds, such as increased M&A activity, many cases of debt restructuring and higher assets under management. Even better for the company, most countries and numerous companies have greatly increased their debt load in response to the pandemic. As a result, several countries and corporations will need to consult Lazard in order to restructure or refinance their debt in the upcoming years. That will be a significant growth driver for the company. We expect Lazard to grow its earnings per share by approximately 5% per year on average over the next five years.

Valuation

Lazard has traded at an average price-to-earnings ratio of 15.0 over the last decade. The stock is currently trading at a forward price-to-earnings ratio of 10.5, which is a nearly 10-year low level, much lower than the historical average.

The exceptionally cheap valuation of the stock can be attributed, at least in part, to the pandemic, which has made investors less willing to pay a premium for financial stocks. The cheap valuation also reveals the market’s concerns that the benefits of the pandemic to Lazard are non-recurring. However, this is not entirely true. Countries and corporations have accumulated so much debt that they are likely to enhance the financial advisory business of Lazard for several years.

Thanks to the massive vaccination program underway, the pandemic is likely to subside at the second half of the year. As soon as the global economy begins to recover, the valuation of Lazard is likely to begin to revert towards its historical level. If the stock reaches its average valuation level in five years, it will enjoy a 7.4% annualized valuation boost in its returns. Even if the stock trades at a more conservative price-to-earnings ratio of 13.0 in five years, it will enjoy a 4.4% annualized valuation boost in its returns.

To cut a long story short, Lazard has an exceptionally attractive valuation right now, as it is trading at a nearly 10-year low price-to-earnings ratio. Thanks to its decent growth prospects, Lazard is likely to enjoy a valuation tailwind in the upcoming years and thus it is likely to offer attractive returns to those who purchase it around its current stock price.

Final thoughts

With the broad market at an all-time high, value investors are struggling to pinpoint attractively valued stocks with generous yields. Lazard is a great candidate for value investors right now, as it is trading at an exceptionally cheap valuation level while it is also offering a 4.8% dividend yield, which is safe thanks to the healthy payout ratio of 50%. Overall, Lazard has become a deep-value stock.