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3 Stocks With Market-Beating Valuations and Yields


The S&P 500 has an average price-earnings ratio of 22.4 and an average yield of just 1.9% as of the most recent close. Investors looking for a better value for their investment dollar that brings a higher level of income may wish to consider purchasing the following stocks, all of which happen to be from the financial sector. Each name trades with a price-earnings ratio in the low-teens range and has a dividend yield above 2.0%.

M&T Bank

M&T Bank Corp. (NYSE:MTB) is a regional bank that has more than 800 branches spread out across New York, Pennsylvania, Maryland and West Virginia. The company generates revenue from commercial and consumer real estate as well as commercial and consumer loans. The stock closed Thursday's trading session with a market capitalization of $12.9 billion.

The company has increased its dividend every year since 2017. It raised its dividend in 2008, but it remained unchanged through 2016. M&T Bank yields 4.4%, which compares very favorably to the stock's 10-year average yield of 2.6% according to Value Line. To put the current yield into perspective, M&T Bank's stock hasn't averaged a 4%-plus yield for an entire year since 2009, when the average yield was 5.2%.

Yahoo lists analysts' estimates for earnings per share at $8.02. The stock's annualized dividend is $4.40, giving M&T Bank a payout ratio of 55%. This is considerably higher than the stock's average payout ratio of 36% since 2010, but likely not at a place where a cut appears imminent.

Shares of M&T Bank closed the most recent trading session at $100.59. Using expected earnings per share, the stock has a forward price-earnings ratio of 12.5, which is lower than the 10-year average price to earnings ratio of 14.3.

M&T Bank offers a yield that is more than double that of the S&P 500 and has a valuation much lower than that of the market index. While dividend growth hasn't occurred very often over the last decade, M&T Bank looks like an attractive option for investors needing a high rate of income now.

Morgan Stanley

Morgan Stanley (NYSE:MS) is a leading global diversified financial company. The company offers securities and asset management services and specializes in underwriting, trading and merger and acquisitions. It derives much of its revenue from its Institutional Securities and Wealth Management businesses, but also has an Investment Management segment. Morgan Stanley has a market capitalization of more than $75 billion.

Morgan Stanley's dividend was cut by more than half in 2009 and then was reduced by more than half again the very next year. The company maintained the same dividend from 2010 through 2013 before returning to growth. In all, Morgan Stanley has raised its dividend for the past six years. It took until 2018 for the company to surpass its dividend total in 2008. Despite this, Morgan Stanley has compounded its dividend by more than 20% over the last 10 years as dividend growth has accelerated in recent years.

Shares of the company yield 2.9%, a much better level than its 10-year average yield of 1.6%. Averaging this yield for all of 2020 would match last year's average, tying the two years for highest average yield in more than 15 years.

Shareholders of Morgan Stanley should receive $1.40 of dividends per share this year. The analyst community targets earnings of $3.75 per share for 2020, giving the stock a forward price-earnings ratio of 37%. The average payout ratio since 2010 is 20%. The dividend is likely safe even with a higher than usual payout ratio. Investors should be aware of the massive dividend cuts that took place during the last recession as another cut could occur during the next recession. However, dividend growth over the last few years shows that Morgan Stanley is generous with its raises when its business is performing well.

Using the last closing share price of $47.79 and expected earnings per share, Morgan Stanley trades with a forward multiple of 12.7 times earnings. This is just above its decade-long average price-earnings ratio of 12.4.

Investors holding Morgan Stanley for income during the last recession received a rude awakening when the company slashed its dividend twice in consecutive years. That said, dividend growth has really taken off in the past few years and the stock trades with an above-average yield. Investors with more risk tolerance may prefer this name to the others on this list due to its combination of yield and dividend growth.

Raymond James Financial

Raymond James Financial Inc (NYSE:RJF) is a financial company that offers underwriting, distribution, trading and brokerage services for retail and institutional customers. The company receives the majority of revenue from its Private Client Group business. Other segments include Capital Markets, Asset Management and Raymond James Bank. Raymond James is currently worth $9.3 billion.

Unlike many financial institutions, Raymond James did not cut its dividend during the last recession. The company raised its dividend in 2008 before pausing it in both 2009 and 2010. Raymond James' dividend has a compound annual growth rate of nearly 12% since 2010. Shares yield 2.2%. For context, the stock has a 10-year average yield of 1.4%. The last time the company averaged a yield above 2% for an entire year was 2009.

Raymond James is expected to distribute $1.48 in dividends per share this year while producing $4.98 of earnings per share for a payout ratio of just under 30%. The company has historically had a very low payout ratio. Since 2010, the average payout ratio is 20%. The expected payout ratio shows that the dividend is in good shape and a dividend cut is unlikely.

Raymond James last traded at $67.53. Based on earnings estimates, the stock has a forward price-earnings ratio of 13.6. This is a discount to the stock's 10-year average price-earnings ratio of 14.7.

While Raymond James doesn't have quite the yield of the other names on this list, it is higher than it has been over the last decade. The payout ratio is quite low, which tells me that Raymond James conservatively manages its dividend. At the same time, the compound annual growth rate is double-digits even when including several years where the dividend didn't grow. A well-managed dividend policy is why the company was able to maintain its payments during the last recession that saw so many financial institutions cut dividends.

Final thoughts

With a market that trades with an earnings multiple above 22 and offers a yield below 2%, finding stocks with higher yields and cheaper price to earnings ratios can be difficult. M&T Bank, Morgan Stanley and Raymond James Financial all have a yield that is superior to their respective historical averages. M&T Bank and Raymond James also trade below their long-term average valuations while Morgan Stanley sits just above its average. Investors looking for income and lower valuation stocks could do well with either of the names discussed in this article.

Disclosure: the author is not long any stocks discussed in this article.

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This article first appeared on GuruFocus.