Editor’s note: This article was updated on June 14, 2022, to correct MGIC Investment Corporation’s price to tangible book value.
These six standout financial stocks are attractive to value investors as they sell below their book value and have other attractive valuation metrics. That means that their shareholders’ equity, the amount left over after deducting all liabilities from the assets, is greater than the stock market value of the companies.
If we exclude intangible assets like goodwill, patents, trademarks and other intangible values on the asset side, then the book value is called tangible book value (TBV). After dividing this by the share count, it becomes the TBV per share (TBVPS) and we can compare it to the stock price.
Value investors generally are looking for a margin of safety. They want to see a stock that is no more than 2/3rds or slight higher of the TBVPS of a financial stock.
The reason for this is simple. We can never really know the real value of most financial assets like loans, bonds, notes and mortgages. If rates rise, their TBV falls, but the more recent quarterly number does not include this recent depreciation in value. So investors want to see a discount below TBVPS.
Let’s dive in and look at these financial stocks.
|AIG||American Int’l Group||$52.78|
|NECB||Northeast Community Bancorp||$11.04|
|MTG||MGIC Investment Corp||$12.66|
American Int’l Group (AIG)
American Int’l Group (NYSE:AIG) trades for about 84% of its common stock book value. Its book value as of March 31 was $55.944 billion.
As of June 13, its market value is $40.9 billion. This is based on 792.19 million shares outstanding (the number of shares on its May 5 filing date for the Q1 10-Q) multiplied by its price of $51.63 on June 13.
Therefore, AIG’s market value of $40.9 billion is just 73% of its $55.94 billion shareholders’ equity.
After excluding intangible assets of $4.35 billion, AIG’s tangible book value (TBV) works out to $51.58 billion. That works out to $65.23 per share for its TBVPS. So, the stock price, at $51.63 is just 79.15% of its TBVPS.
That leaves a very good margin of safety for value investors. For example, with the $1.28 dividend, AIG stock now yields 2.48%, and given its 2022 earnings forecast of $5.29, the stock is on a forward multiple of 9.76x. For 2023, the stock is on a multiple of 8.1x with its $6.34 earnings forecast from the average of 14 analysts.
AIG plans on spinning off its non-property and casualty division, Corebridge Financial, sometime in the next few months. AIG will still have a controlling stake in this Health and Retirement insurance company as a public company. So this is one of the best cheap financial stocks selling below book value.
Assured Guaranty (AGO)
Assured Guaranty (NYSE:AGO) is both an insurance company and an asset management firm, which is growing to become the majority of its earnings. At $51.63 on June 13, it trades below 60% of its $86.61 TBVPS. That works out to a P/TBVPS ratio of 0.596.
Another way to look at this is that theoretically an investor can make a 67.8% return on investment if the stock were to rise or the company was sold for its tangible book value. That is because if you divide 1 by 0.596, you an ROI of 0.678.
Moreover, AGO has paid a dividend every year consecutively for the past 17 years and its present dividend is $1 per share. That gives AGO a decent dividend yield of 1.80%.
Moreover, analysts project that 2023 earnings will grow 6.5% from $4.28 to $4.56. That puts the stock on a forward multiple of 12 times 2022 earnings and just 11.3x 2023 earnings-per-share (EPS).
This is a good return for most investors and shows that this is one of the best financial stocks on this list.
Citigroup (NYSE:C) trades below its book value and its tangible book value. On June 13, the stock was at $45.69, but its book value, as of March 31 was $92.03 and its TBVPS was $79.74, according to Seeking Alpha.
So, even compared to its TBVPS, the stock is deeply discounted at just 57.3% of its tangible book value per share. That leaves plenty of room in case any of the bank’s loans turn out to be soar, as often happens during a recession.
At this point, Citigroup pays a dividend of $2.04 and that works out to a yield of 4.46% of its price as of June 13 of $45.69. Moreover, at this point analysts still expect higher earnings in 2023 of $7.39, which is 7.9% higher than earnings forecast for 2022 of $6.85.
In addition, TipRanks reports that the average price target of 15 analysts is $64.67 per share, or 41.5% over yesterday’s price. That shows that trading below book value on a tangible book value produces a potential good ROI for value investors.
Northeast Community Bancorp (NECB)
Northeast Community Bancorp (NASDAQ:NECB) is a White Plains, NY bank holding company that makes loans to individuals and corporations. It has seven full-service branches in New York and three full-service branches in Massachusetts. Most of its loans are real-estate related.
The key point about NECB is that its book value and tangible book value per share are both significantly higher than the stock price. For example, its book value as of March 31 was $16.95 per share and the TBVPS was $16.91.
That means that at the June 13 price of $11.01, it is just 65% of its TBVPS. This implies that if the bank were to sell to some other firm at its TBVPS investors would make good money. For example, investors buying in NECB stock will make an ROI of 53.6%.
On top of this, NECB pays a dividend of 72 cents annually. That works out to an annual dividend yield of $6.54% and the earnings forecast for 2022 at $1.15 more than cover this by about 60%. That also puts the stock on a cheap forward multiple of just 9.6x. Since the EPS for 2023 is forecast to be 14.8% higher at $1.32, the multiple falls to 8.34x for 2023.
So here we have a bank stock at 2/3rds of tangible book value, earnings cover the dividend by 60%, which is at a 6.54% yield and a forward P/E of 8.3x for 2023. This is the definition of a margin-of-safety value stock.
MGIC Investment Corp (MTG)
MGIC Investment Corporation (NYSE:MTG) is an insurance company that provides private mortgage insurance that provides mortgage default protection on individual residential mortgage loans. This is a highly profitable business, but given the forecast downturn in mortgage lending the stock is now cheap
At $12.36 on June 13, MTG stock trades for just 83.7% of its tangible book value per share of $14.75 as of March 31. It also a pays a 32 cent annual dividend (quarterly), which its earnings of $2.14 this year more than cover. This gives the stock a 2.59% dividend yield. Moreover, its forward multiple of just 5.75x makes MTG stock very cheap.
This is a play on the fact that the market already has factored in the mortgage downturn in its stock price. Given that it is so far below tangible book value and the likelihood that its assets are reasonably secure, this looks like a good bet for value investors.
Prudential Financial (PRU)
Prudential Financial’s (NYSE:PRU) EPS, although set to fall from $14.58 in 2021 to $11.54 in 2022, are forecast to rise by almost 10% to $12.63 in 2023.
That puts PRU stock on a forward P/E multiple of 8.2x for 2022 and 7.5x for 2023. Moreover, the stock trades for just 80% of its TBVPS of $117.06 as of March 31, according to Seeking Alpha. That is based on its price of $94.25 as of June 13.
PRU stock also pays a dividend of $4.80 per share, which is less than one-third of its 2022 earnings forecast. This produces a dividend yield of 5.09% at its price of $94.25.
As a result, a lot of really bad news is already put into this stock, and it reflects analysts’ fears of a recession. This makes it a good potential investment for value investors looking for financial stocks selling below their book value.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.