Quick Hitters: Four Financial Stocks
In this F.A.S.T. Graphs™ quick hitter, we’ll look at analyst estimates of the forward 2-year total annual return rate of four dividend growth financial powerhouses. The industry has changed dramatically since the crash in 2008, so we’ll base the time frame of our estimates just before that crash with a 7-year average P/E. We’re assuming this average P/E stays constant in the future.
The Chubb Corporation (CB).
“Chubb Corp is a holding company. The Company, through its subsidiaries is engaged in property and casualty insurance.” ~Seeking Alpha
Years of Dividend Raises: 28
Dividend Yield: 1.9%
Dividend Growth Rate 3 Year Average: 8.69%
Revenue in 2004 (USD MILLION): $13,177
Revenue in 2013 (USD MILLION): $13,947
Payout Ratio: 23%
TTM P/E: 12.2
Forward P/E: 13.1
7 Year Normal P/E: 12.4
With its recent run up in price, Chubb appears overvalued to its 7-year normal P/E and analyst predictions. In two years’ time, an investor today would have seen price depreciation of -$4.37 and a total annual return rate of only 0.11%. However, this is a wonderful company that has been growing for a long time despite flat revenues. Those dividends don’t look like they’ll stop increasing in the mid to high single digits any time soon. I would become interested if it were to fall back to its August 2014 prices in the mid $80’s or so.
“MasterCard Inc is a global payment solutions company that provides various services in support of the credit, debit & related payment programs to financial institutions and other entities that are its customers.” ~Seeking Alpha
Years of Dividend Raises: 3
Dividend Yield: 0.5%
Dividend Growth Rate 3 Year Average: 103.54%
Revenue in 2004 (USD MILLION): $2,593
Revenue in 2013 (USD MILLION): $8,346
Payout Ratio: 17%
TTM P/E: 28.9
Forward P/E: 19.6
7 Year Normal P/E: 23.3
Mastercard has also run up in price since it saw the low $70’s in October. Based on its 7-year normal P/E and analyst predictions, an investor at today’s prices can expect a 2-year total annual return rate of 9.76%. This return might not seem like much on the surface, but unlike Chubb above, Mastercard has grown its revenue by 221.87% in just 9 years years. The .05% dividend yield looks like a joke at first glance, but in its 3 years of raising dividends, they’ve increased by 966.67%. This company is growing very fast, and I love the long term potential here; I want to eventually add it to my portfolio alongside my holding of Visa (V).
The Toronto-Dominion Bank (TD)
“Toronto-Dominion Bank is a Canadian bank. It provides Canadian Personal and Commercial Banking, Wealth and Insurance, US Personal and Commercial Banking, and Wholesale Banking.” ~Seeking Alpha
Years of Dividend Raises: 4
Dividend Yield: 3.97%
Dividend Growth Rate 3 Year Average: 11.95%
Revenue in 2005 (USD MILLION): $11,896
Revenue in 2014 (USD MILLION): $29,961
Payout Ratio: 51%
TTM P/E: 12.5
Forward P/E: 10.7
7 Year Normal P/E: 12.2
Unlike our first two businesses, the stock price of TD has taken a dramatic dive recently. Based on its 7-year normal P/E and analyst predictions, an investor could expect a 2-year total annual return rate of 14.98% at today’s prices. That’s an attractive return, and I believe the stock market’s worries over consumer debt, real estate, and oil are overblown. I recently purchased competitor Bank of Nova Scotia (BNS) who has even more oil exposure than TD. Several of the major Canadian banks seem to offer some of the best value in today’s market. I would love to throw some TD shares into my ROTH IRA.
T. Rowe Price Group, Inc. (TROW)
“T. Rowe Price Group Inc is a financial services holding company, which through its subsidiaries, provides investment advisory services to individual and institutional investors in the sponsored T. Rowe Price mutual funds and other investment portfolios.” ~Seeking Alpha
Years of Dividend Raises: 27
Dividend Yield: 2.14%
Dividend Growth Rate 3 Year Average: 23.51%
Revenue in 2004 (USD MILLION): $1,277
Revenue in 2013 (USD MILLION): $3,484
Payout Ratio: 40%
TTM P/E: 18.7
Forward P/E: 14.6
7 Year Normal P/E: 21.6
We have our winner, with the highest analyst 2-year forward total annual return rate of 22.43%. I love this fast growing asset management company. I almost initiated a position but recently went with competitor Franklin Resources (BEN) instead. However, I would love to become a shareholder of TROW at some point.
Normal P/E is just one of many different ways to value a stock. For instance, if you don’t think TROW’s P/E ratio will stay near its 7-year average of 21.6 and you only estimate the analyst forward annual return compared to the standard attractive P/E value of 15, you’ll see how different the total annual rate of return looks on our winner TROW.
TROW now has an analyst 2-year forward total annual rate of return of only 2.27% and depreciates in price by $0.67.
While this is interesting research, a true dividend growth investor isn’t in it for a 2-year short term capital gain like I’ve shown in this article. We don’t care about a stock’s price once we’ve already invested in it because we’re in it for those reliable dividends that grow each and every year. However, when valuing a company one might benefit from this information when looking at historical and current data trends. While I’ve never held much faith in analyst predictions, it’s worth noting that the featured businesses hit or beat analyst 2-year forward earnings estimates about 80% of the time dating back 15 years. Those are pretty accurate predictions.
Do you look at analyst forward P/E? What are your thoughts on these businesses?