U.S. markets open in 37 minutes

3 Undervalued Financials Raise Dividends

The Financial Select Sector SPDR Fund (XLF) has declined 18.5% over the last year. The S&P 500 index, on the other hand, has gained 1.8%. In other words, financials have severely underperformed against the broader market.

This has given rise to higher than usual dividend yields among companies in this sector. This article will discuss three companies in the financial sector that recently gave investors a dividend increase and trade well below their 10-year average valuations.

Ameriprise Financial announced a 7.2% dividend increase on May 6, which gives the company 16 consecutive years of dividend growth. The company hasn't announced a payment date, but it will likely be towards the end of May if history is any guide.

Ameriprise Financial has paid a dividend every year since it was spun off from American Express in 2005. This means that Ameriprise Financial's dividend was increased through the last recession, just as many companies in the financial sector were slashing theirs. The dividend has been increased with a compound annual growth rate of 18.5% over the last decade. The stock yields 3.3% today, superior to the 10-year average yield of 2.2%. The current yield is even more attractive when compared to the average yield of 2% for the S&P 500.

With a new annualized dividend of $4.16 and consensus estimates calling for $15.01 in earnings per share for 2020, the company's payout ratio is just 28%. This is below the 10-year average payout ratio of 29%.

In addition to a solid yield and low payout ratio, shares of Ameriprise Financial are inexpensive at the moment. Using the most recent closing price of $125.61 and analyst-predicted EPS for the year, the stock trades with a price-earnings ratio of just 8.4, even after shares have spiked more than 17% in two days following the recent earnings release. Ameriprise Financial's stock is lower by 15% compared to 12 months ago.

The combination of yield, dividend growth and valuation make Ameriprise Financial look attractive to me, even after the rise in price following the release earnings results.

MetLife, Inc.

MetLife, Inc. (NYSE:MET) provides insurance, asset management, employee benefits and annuities to retail investors and institutions alike. The company has a presence around the world and a market leadership position in the U.S., Europe and Asia. MetLife has a market capitalization of $31.3 billion.

Following the announcement of a 4.5% dividend increase at the end of April, MetLife has now increased its dividend for eight years in a row. The company held steady, but didn't cut its dividend from 2007 through 2012 prior to the start of this growth streak. Even with this pause, the dividend has increased at a rate of nearly 9% over the last 10 years. The current 5.3% yield is almost double the decade-long average yield of 2.8%.

The annualized dividend is now $1.84. The analyst community sees EPS of $5.68 for the year, which equates to a payout ratio of 32%. This is above the average payout ratio of 25% from 2010 through 2019.

With a current share price of $35.22, MetLife trades with a forward price-earnings ratio of just 6.2. This is below the 10-year average price-earnings ratio of 9.2. This would be the lowest price-earnings ratio in more than a decade if the stock averaged this valuation for an entire year. MetLife's stock is down more than 27% compared to the same time last year.

People's United Financial

With a market capitalization of $5.1 billion, People's United Financial (NASDAQ:PBCT) is the smallest company on this list. The saving and loan bank has 450 branches and more than 600 ATMs throughout the northeastern United States. The company provides services to customers in southeastern New York, Connecticut, Massachusetts, Vermont, New Hampshire and Maine.

The company raised its dividend 1.4% near the end pf April. This is now the 28th consecutive year of dividend growth for People's United Financial. The company's dividend has increased its dividend by 1 cent every year since 2010. The most recent raise is in-line with the average increase over this period of time. Despite this low growth, the stock offers a yield of 6.2% as of Friday's closing price. For comparison purposes, the average yield was 4.4% over the last decade and shares have only had a yield over 5% twice (2011 and 2012) since 2004.

The payout ratio is quite high. Using the annualized dividend of $0.71 and EPS predictions for the year of $1.05, the stock has a payout ratio of 68%. The payout ratio over the last five years was 66%.

Shares of People's United Financial closed the Friday trading session at $12.06. Analysts' EPS estimates for 2020 give the stock a price-earnings ratio of 11.5. People's United Financial's earnings declined considerably following the last recession, which distorts the long-term average valuation. The stock has traded with a price-earnings ratio of 16.3 since 2015. Shares of the company are down more than 32% over the last 12 months.

People's United Financial is likely the riskiest stock of the three financials discussed in this article, but the company was able to maintain its dividend even as its earnings plummeted during the financial crisis. That is a sign of strength, in my opinion.

Final thoughts

The financial sector as a whole has been a tough investment over the last year. On the bright side, many stocks in this sector now provide a dividend yield that is much higher than usual, which is attractive to income-seeking investors.

Disclosure: The author is not long any stocks mentioned in this article.

Read more here:



Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.