The best bargains in the market are cheap financial stocks with high dividend yields. These stocks have attractive 5% to 6% annual dividend yields and very low valuation ratios. I put together a list of five of the best cheap stocks to buy now.
For example, there are a number of banks and insurance companies with 5% to 6% dividend yields and price-earnings ratios below 10 times. Moreover, in many cases, the management has made clear that they fully intend to keep on paying their dividends. That is despite the risk implied by the higher-than-normal dividend yields.
The forward-looking P/E ratios are for the year 2021 since many of the companies have taken large reserves to their earnings for 2020. GAAP rules require them to estimate their expected loan or insurance-related losses in advance and deduct those from earnings and book value.
So, as a result, investors get a cheap price, plus they are paid to wait for the financial earnings to return. Most of these stocks are regional banks or mid-sized insurance companies, so they are not as visible or volatile as many of the money-center financial stocks.
Estimating Target Prices for These Cheap Financial Stocks
One more thing. I estimated the upside for each stock using the average of three methods. First, I estimated the target value based on the stock’s average historical dividend yield. You take the present dividend per share and divide it by the average dividend yield in the past four or five years.
Second, I used the average P/E ratio for each stock over the past five years. You can go to the Value Line website and use their historical average P/E ratios. Many public libraries in the U.S. offer online access to the Value Line and Morningstar analyses on stocks. Then, you use the average historical P/E ratio and multiply it by the forward estimated earnings per share.
Third, I estimated a target price for each stock by using an average P/E ratio for some of the companies’ peers and competitors. I applied this average P/E ratio to the forward expected earnings. This provides a third estimated target price.
Lastly, I averaged each of these price targets to derive the potential upside for each stock. Here are five cheap stocks to buy now:
- Prudential Financial (NYSE:PRU)
- Comerica (NYSE:CMA)
- Huntington Bancshares (NASDAQ:HBAN)
- Manulife Financial (NYSE:MFC)
- Citizens Financial Group (NYSE:CFG)
Cheap Stocks to Buy Now: Prudential Financial (PRU)
Target Price Upside: 38%
Prudential Financial is a large New York-based life insurance company that is extremely cheap. As you can see, not only does it have an attractive 6.9% dividend yield, but it is also selling well below its book value.
For example, the tangible book value per share (TBVPS) represents what investors would receive if the company was liquidated. The TBVPS is at $153.48, as of March 31, 2020, according to Seeking Alpha. But the stock price is $63 per share. That leaves about $90 per share between its liquidation value and the price of the stock.
The market fears Prudential will have large write-downs in the future. This fear is overdone. Even if half of that amount is taken as reserves, the upside is still $45 per share. That represents 69.5% to investors.
Using the three methods to set a target price, PRU stock should trade at $88.18 per share. That represents an upside of 38% upside from today’s price.
For example, the average dividend yield for PRU stock has been 3.8% over the past four years, according to Seeking Alpha. That results in a potential target value of $116.32 per share, or over 80%. The other three methods result in a lower average target price.
Management recently increased the quarterly dividend rate to $1.10, up 10 cents. In fact, they made a second declaration of the same higher dividend on May 12. Prudential Financial has consistently raised the dividend for the past five years. I would look for it to do so again next February.
Target Price Upside: 78%
Comerica is a regional bank holding company with major operations in Texas, Florida, California, Arizona and Michigan. Comerica had a rough first quarter, as most banks did. It took a larger reserve for loan losses expected during the year. Earnings this year will likely slump to $1.14 per share, down from $7.87 last year.
However, next year, 21 analysts polled by Seeking Alpha believe the company will return to normalized earnings per share of $3.45. CMA stock already reflects the expected earnings drop this year.
Moreover, the company recently declared a regular 68-cent dividend on April 28. In fact, Comerica suspended its share repurchase program to maintain its attractive dividend.
I believe management will continue to pay the dividend as a result. This gives the stock an attractive upside potential of 78% from today’s price.
Huntington Bancshares (HBAN)
Target Price Upside: 48%
Huntington Bank is a Midwest-based regional bank, and it has 944 branches in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania and West Virginia. Like other banks, it took a sizable loan loss reserve in Q1. The market has already discounted most of this in the HBAN stock price.
Looking forward, analysts estimate the company will make 93 cents per share in 2021, according to Seeking Alpha. That puts the stock at a cheap forward P/E ratio of 11.
More importantly, HBAN stock now has a very attractive 5.9% dividend yield. The company recently declared a quarterly dividend of 15 cents per share. Typically the company raises the dividend per share every fifth quarter. It will be interesting to see if that happens in July. I suspect the company will maintain the current dividend level.
Recently the company indicated it raised $500 million in preferred equity and also suspended its share repurchase program. It has not indicated it would cut the common stock dividend.
Finally, the target price for HBAN stock using the three methods described above is 48% above the present price. Look to make money in this stock over the next year as valuations return to normal.
Manulife Financial (MFC)
Target Price Upside: 28%
Manulife Financial is the largest Canadian insurance company. The company had a difficult Q1. People don’t buy life insurance products during recessions. Moreover, interest rates have dropped and lowered the interest earned by the company on its investments. This also hit earnings from its asset management division.
The company raised $200 million in private notes. However, it also recently raised its dividend by 3 cents CAD. And it is still paying the dividend — which yields 5.8% at today’s price. In fact, Manulife recently declared a second dividend at this higher rate on May 6.
My target for the stock is $19.65 per share, representing upside of 28% from today’s price.
Citizens Financial Group (CFG)
Target Price Upside: 60%
Citizens Bank has branches in 11 U.S. states. The company took a big loan loss reserve in Q1. However, its deposits and loans also grew by 8% and 10%, respectively. In addition, the company, like many others, has raised preferred equity to bolster its balance sheet.
However, the dividend is still intact. In fact, as part of its first-quarter earnings presentation, Citizens Bank said that it suspended share buybacks in order to remain well-capitalized. It also said that it would be able to maintain its dividend “even in more severe scenarios.”
Therefore, that is good news for shareholders. My target price for the stock is 60% higher than today’s price. Look to make money in this stock over the next several years.