Due in large part to the spread of the coronavirus, markets have suffered steep declines over the past two weeks. The declines in the index have been breathtaking. For example, it took the S&P 500 just six trading days to enter into correction territory, the fastest time in its history.
There has been almost no place for investors to hide during this time, which is why the 10-Year Treasury note had seen a significant decline in yield as investors flooded into what might appear as the only safe haven currently in the market. The 10-year note yielded 1.30% as recently as Feb. 27. By Friday of last week, the yield on the note dropped to 0.74%.
For investors who need income or have a longer time horizon, the steep drawdown in stock prices offers an opportunity to acquire shares of companies with compelling yields at reduced valuations. Disciplined investors can use this opportunity in market declines to purchase stocks with yields that have not been seen in several years.
Listed below are five financial services stocks that closed the most recent trading session with a current dividend yield above the stock’s five-year average yield.
Aflac
- Current yield: 2.7%
- Five-year average yield: 2.3%
Aflac Inc. (AFL, Financial) is the largest underwriter of supplement cancer insurance in the world. Approximately 70% of revenue come from Japan, with the U.S. contributing the remainder. The company also provides life, health, accident and long-term care insurance.
Aflac has increased its dividend for 38 consecutive years. This means the company has experienced several recessions and still provided an annual dividend increase. This speaks volumes to Aflac and its conservative management considering how many companies cut or paused dividend growth during the last recession. The company raised its dividend 3.7% for the March 2 payment. Aflac has a five-year average dividend increase of 6.5%.
With an annualized dividend of $1.12 and expected earnings of $4.42 per share, the expected payout ratio for 2020 is just 25%. This matches the company’s five-year average payout ratio.
Aflac closed Friday’s trading session at $40.78. Using analysts' estimates of $4.44 for 2020, shares have a price-earnings ratio of 9.2. This compares to the stock’s five-year average earnings multiple of 10.7.
The Bank of Nova Scotia
- Current yield: 5.3%
- Five-year average yield: 4.4%
Bank of Nova Scotia (BNS, Financial), which is commonly referred to as Scotiabank, is the third-largest bank in Canada by assets. The bank has more than 3,100 offices and branches in Canada and the U.S. Scotiabank also has a presence in more than 50 other counties around the world. Just under half of net income came from Canadian banking last year, with the remainder coming from the U.S. and international markets. Shares of Scotiabank are listed both on the Toronto Stock Exchange as well as the New Your Stock Exchange.
Scotiabank has increased its dividend for nine consecutive years in Canadian currency. Unlike most large financial institutions during the last recession, Scotiabank did not cut its dividend, though it did pause its dividend growth. The company’s most recent increase of 3.5% was announced in late August. Scotiabank has a five-year average growth rate of 5.6%.
The company is expected to pay out $2.71 and to earn $5.51 per share in 2020 for a dividend payout ratio of 49%. This is nearly in line with the five-year average payout ratio of 48%.
Using the most recent closing price of $50 and expected earnings per share of $5.51 for 2020, Scotiabank is trading with a forward price-earnings ratio of 9.1. This compares quite favorably with the average price-earnings ratio of 11.4 that the stock has traded with over the last half decade.
JPMorgan Chase
- Current yield: 3.2%
- Five-year average yield: 2.6%
JPMorgan Chase & Co. (JPM, Financial) is one of the largest financial institutions in the world, with a presence in every aspect of financial services, including consumer and commercial banking, asset management, credit cards and home lending.
After cutting its dividend in both 2009 and 2010, JPMorgan has provided investors an annual increase for nine consecutive years. The company last raised its dividend for the Oct. 31, 2019 payment, which resulted in a 12.5% increase from the previous year. The dividend has compounded by an average annual rate of 14% over the last five years, giving JPMorgan the highest dividend growth rate on this list.
Based on the most recent increase, JPMorgan should pay out $3.60 in dividends per share in 2020. Using consensus estimates of $10.84 of earnings per share for the current year, JPMorgan has an expected payout ratio of 33%. This is very near the five-year average payout ratio of 32%.
JPMorgan finished the trading week at $108, which gives the stock a forward price-earnings ratio of 10. The stock has an average earnings multiple of 11.6 over the last five years, which makes JPMorgan appear undervalued against its historical average.
Prudential Financial
- Current yield: 6.1%
- Five-year average yield: 3.4%
Prudential Financial Inc. (PRU, Financial) is a leading life insurance company in the U.S., offering a variety of financial products and services such as insurance and investment management. The company operates in more than 40 countries around the world and has nearly $1.6 trillion in assets under management. Prudential has four reported business segments: PGIM (formerly known as Prudential Investment Management), U.S. Workplace Solutions, U.S. Individual Solutions and International Insurance.
Prudential reduced its dividend by 50% in 2008, but quickly returned to dividend growth the following year. By 2010, the company’s dividend equaled its 2007 payment, showing that Prudential possessed a resiliency that many others in the financial sector lacked at that time. The company announced in early February that it was raising its dividend by 10% for the March 12 payment. This most recent increase is in line with the five-year average growth rate.
Prudential is expected to distribute $4.40 in dividends for the year, while the analyst community expects earnings of $12.31 per share for 2020, giving the company a payout ratio of 36%. This is slightly above the 30% average payout ratio that the stock has had for the past half-decade, but still on the low side. Of the five stocks on this list, Prudential offers the greatest difference between current yield and five-year average yield.
Shares of Prudential are trading at $69.81. Using expected earnings for the year, the stock has a multiple of just 5.7. This compares quite favorably to the five-year average price-earnings ratio of 8.7.
Toronto-Dominion Bank
- Current yield: 4.7%
- Five-year average yield: 3.7%
The Toronto-Dominion Bank (TD, Financial) is one of the largest banks in Canada. The company operates in Canada, the U.S. and select countries around the world. In total , Toronto-Dominion has more than 26 million customers. The company reports three business segments: Canadian Retail, which includes commercial banking and insurance, U.S. Retail, which includes TD Bank and TD Ameritrade, and Wholesale Banking.
Unlike its counterparts in the U.S., Toronto-Dominion didn’t cut its dividend during the last recession. The company did pause growth in 2010, but has raised its dividend every year since. Dividends have grown at a rate of 7.6% in Canadian currency over the last five years. Shareholders received a 6.8% increase in local currency for the payment scheduled for April 30.
In U.S. dollars, Toronto-Dominion is now likely to pay out dividends of $3.16 for the year. Using the average analysts’ estimate of $4.78 of earnings per share for 2020, the payout ratio is 66%. This is the highest payout ratio on this list and higher than the company’s five-year average payout ratio of 44%. Still, the dividend looks to be safe, though investors may see a lower rate of dividend growth going forward. Due to the nearly 5% yield, investors may be willing accept a lower dividend growth rate as a tradeoff for higher income.
Toronto-Dominion trades at $48.78. Based off of consensuses earnings estimates, shares have a price-earnings ratio of 10.2. With a an average price-earnings ratio of 12.1 over the last half decade, Toronto-Dominion appears to be undervalued today.
Final thoughts
Investors have seen double-digit declines in the market averages over the past two weeks. While the declines likely froze many investors or caused many to sell, those looking to take advantage of the downturn could be rewarded in the future.
While investors bid up the price and lowered the yield on the 10-Year Treasury note, those seeking income from equities can purchase stocks trading at dividend yields that are well above the average.
Aflac, The Bank of Nova Scotia, JPMorgan Chase, Prudential Financial and Toronto-Dominion Bank all offer a dividend yield that is superior to their average yields over the last five years. Even better, all of these stocks now trade below their average valuations.
Markets are likely to remain turbulent until the coronavirus is managed successfully, but these five financial services stocks and the income they produce will likely help shareholders sleep better at night.
Disclosure: Author is long Aflac and JPMorgan Chase.
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