A recent article about bond king Bill Gross’ favorite banks got me thinking about large-cap stocks trading below book value. Gross liked these three bank stocks because they sold below book value and yielded 7% or more.
The current price-to-book value ratio for the S&P 500 is 4.1, a multiple considerably higher than Gross’s bank stocks. The index’s current dividend yield is 1.6%.
According to Finviz.com, there are 29 stocks in the index trading below book value. Of those, six are yielding more than 7%. Only one — KeyCorp (NYSE:KEY) is a bank — and it’s one of Gross’ three bank picks.
To simplify my life, I will broaden my search to include all those yielding 3% or more. That’s still double the index’s yield. That increases my options to 23, a far easier pool of candidates.
If I can, I’ll also select stocks from three different sectors, excluding the banks.
Kraft Heinz (KHC)
Kraft Heinz (NASDAQ:KHC) has a P/B ratio of 0.83 and a dividend yield of 4.8%.
Berkshire Hathaway (NYSE:BRK.B, NYSE:BRK.A) owns 26.5% of the food and condiment company’s stock. In the third quarter, Berkshire’s share of earnings ($69 million) was less than the dividends it received ($131 million). However, on an adjusted basis, its share of profits would have been $236 million (26.5% of $890 million), 14.3% higher than a year earlier.
In the big picture, Kraft Heinz is a blip on its income statement. The holding company invested approximately $17 billion, first in Heinz and then Kraft, and today, it’s worth significantly less ($10.9 billion).
However, if you include dividends, it’s likely much closer to break-even than investors realize, so while it won’t go down as Buffett’s best bet to date, there’s still plenty of time for the company to get its act together.
As the company noted in its Q3 2023 press release, “In the third quarter, Kraft Heinz hit a milestone in its transformation — reaching its target Net Leverage of approximately 3.0x. ‘A stronger balance sheet, along with advancements we have made across the business, gives us further conviction behind our strategy,’” said Patricio.
In the nine months ended Sept. 30, Kraft Heinz’s free cash flow was $1.84 billion, more than double a year earlier. On an annualized basis, its $2.45 billion in free cash flow represents a free cash flow yield of 4.1% based on an enterprise value of $59.6 billion.
Anything between 4% and 8% is growth at a reasonable price.
Viatris (VTRS)
Viatris (NASDAQ:VTRS) has a P/B ratio of 0.53 and a dividend yield of 5.2%.
Viatris is one of those companies that many investors probably forgot about. Pfizer (NYSE:PFE) spun off its Upjohn business and merged with Mylan in November 2020. Pfizer shareholders owned 57% of the company, while Mylan owned 43%.
On Oct. 1, Viatris announced that it would sell substantially all of its over-the-counter (OTC) business for $2.2 billion. It also agreed to sell its Active Pharmaceutical Ingredients (API) and Women’s Healthcare businesses for up to $1.2B. Including the 2022 sale of its Biosimilars business, it’s generated $6.94 billion from selling these non-core assets.
Viatris began its transformation in December 2020. The plan was to cut $1 billion annually from its operating expenses. Approximately 20% of the workforce could be let go as part of the cost savings initiatives. The divestitures accounted for more than 6,000 of the personnel cuts.
New CEO Scott Smith said in the Oct. 1 announcement that it will hit its deleveraging goal of 3x gross leverage by the middle of 2024. In the year ahead, Smith will lead the company through Phase 2 of its transformation.
Get paid 5.2% to wait for the transformation to play out.
Invesco (IVZ)
Invesco (NYSE:IVZ) has a P/B ratio of 0.56 and a dividend yield of 5.9%.
As recently as 2014, Invesco had a P/B ratio over 2.0. If that were the case today, its market capitalization would be nearly $22 billion, not $6.1 billion. Except for the March 2020 correction, IVZ hasn’t traded this low since 2009.
Active management has bled assets in recent years. In Q3 2023, they were $1.49 trillion, 67.8% higher than $888.2 billion in 2018. That’s about on par with the growth of the S&P 500 over the same period.
In the third quarter, Invesco’s net long-term inflows were $2.6 billion. It continues to sharpen its focus on ETFs, Private Markets, Fixed Income, and its business in the Asia/Pacific region. At the same time, it’s doing its best to manage its costs.
As a result, its adjusted net income in the quarter was $159.2 million, 10.2% higher than Q2 2023 and 2.2% better than a year ago.
The ETF business finished the third quarter with $552 billion in assets under management, with net long-term inflows increasing by $11.8 billion. A solid performance was delivered by the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP), which had net inflows of $3.6 billion.
That makes sense. I’ve said for a while now that RSP and other equal-weight ETFs make sense for investors who don’t want top-heavy funds in their portfolios.
If you’re an income investor, the 80-cent annual payout is an excellent 5.9% yield, even in this higher interest rate environment. With net debt of just $248 million (4% of market cap), this remains a value play waiting to play out.
On the date of publication, Will Ashworth did not have (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.
