The bailouts of 2008 and 2009 may have saved the big banks and auto companies, but their stocks remain dirt to many investors, eight years on.
The conventional wisdom of investing is that you buy what is out of favor, then hold until it becomes favored again. Thus it was fashionable in 2009 and 2010 to pound the table for companies like Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), American International Group Inc (NYSE:AIG) and General Motors Company (NYSE:GM).
If you bought these stocks, however, your performance has lagged that of the market, and they remain bargains, even in late 2016. You may have enjoyed the dividends, but the capital gains have, by and large, eluded you.
Fact is the bailouts were wildly unpopular with investors, no matter how necessary they may have been for the general economy.
Investors are still not ready to make nice with the recipients.
Big Banks Are Dirt Cheap
The big banks that did dirty deeds and took the bailout money remain dirt cheap.
Citigroup and Bank of America Corp (NYSE:BAC) still trade well below their book values. JPM trades at a slight premium to book value, which is the cost of its assets minus their accumulated depreciation.
For instance, if you sold off all of Citigroup’s assets, accounting for the depreciation on them, you’d have one-third more than its current market cap of $141 billion. Citigroup is, eight years after the bailout, worth more dead than alive.
Seen on a price-to-earnings basis, all the big banks remain cheap as chips. Citigroup sells for 10.5 times earnings. JPMorgan Chase sells for 11.5 times earnings. Right now you can get dividends from JPM that yield 2.84%, better than a 30-year government bond, and you get to keep the stock.
Wells Fargo & Co. (NYSE:WFC) was an exception to this rule, although its P/E even at its high last year was still under 14. But guess which bank turned out to be staffed by dishonest people? WFC is now down to a P/E of 11 and a yield of 3.4%, meaning it’s right back in the mud with its brethren.
Perhaps the best example of this phenomenon — of huge institutions failing to perform as stocks while they recover financially — is AIG. AIG received the biggest bailout of them all, estimated in 2014 at $182 billion. That’s three times more than the insurance giant is worth today, after selling assets to get its books in order, and after initiating dividends in 2013 that started at 10 cents per share and have since tripled to 32 cents.
General Motors Demoted to Corporal
You can see the same phenomenon in the auto stocks. You can’t buy them for capital gains, even now.
Take GM … please. The company got $49.5 billion in loans, for a 61% equity stake. After selling its assets in 2014, the government’s cost came to $11.2 billion.
Some said at the time the government got out early, selling its stake in December 2013. But it turns out Barack Obama pulled a Warren Buffett on that one. Since then the stock is down 20%, despite steady quarterly dividends that now come to 38 cents/share. You can get a 4.77% yield, out of dividends, just by buying GM right now. But the P/E is – and this is not a misprint – 4.08. That’s right, GM earned $9.687 billion, it’s on pace to do that again, but the market cap of the stock is just over $50 billion.
It’s not just GM. Ford Motor Company (NYSE:F), which did not take the bailout, has a P/E of 5.3 and a yield of 5.04%. All the automakers remain out of favor. Toyota Motors Corp. (ADR) (NYSE:TM) currently sells for a P/E of 8.
Bargains Mean Yield
The bottom line is that the sectors subject to the bailout remain bargains, and are likely to remain bargains. For investors it means they’re yield stocks, more like cigarette companies such as Philip Morris International Inc. (NYSE:PM), which yields 4.3% but is up 43% in value over the last five years.
The difference is that cars and loans are not designed to kill you.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
