We are not that far removed from the near total collapse of the financial and banking systems in the United States, and the rest of the world as well. In 2008, as the banking system found itself holding a massive amount of poorly collateralized loans on their books, with no hope of recovering the principle, the prospects of having to write down these losses against their capital reserves presented what most believed to be a potentially catastrophic situation, capable of bringing the global financial system to its knees.
The federal government of the United States injected enough liquidity and monetary support to the overall economy in general, and the banks in particular, to avert the potential crisis to a great extent.
Now that we are a few years away from that event, and the Federal Reserve is still flooding the system with cheap cash and holding short term interest rates at exceptionally low levels, it is time for prudent investors to take advantage of the opportunity to produce safe, consistent returns from the recovery of the banking industry over the next several years. While the industry is currently rife with values, I selected four “household names” to review for investment consideration.
Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), and Wells Fargo & Co (NYSE:WFC) are four names that are probably readily recognized by almost anyone in America today and most people in the developed world. At today’s valuations, I believe all four of these to be worthy of careful consideration as potential investments.
Bank of America could explode higher
With a price to book ratio of only 63%, Bank of America Corp (NYSE:BAC) would have to rise over 50% to simply be trading at par with the liquidation value of its assets. Given that we are not far removed from the 2008/2009 meltdown, it is unlikely that the book value is overstated at this time.
Historically, well run banks can trade for between 1.3 and 1.5 times book value, and still be considered fairly priced. To reach that level of valuation, Bank of America Corp (NYSE:BAC) would have to double in price. Its current price produces a forward P/E of 9.68, which is right in line with its 5-year projected earnings growth rate of 9.8%. It also has a dividend yield of 0.31%.
If a PEG of 1 plus the dividend rate is used as an estimate of value, then Bank of America Corp (NYSE:BAC) should have the ability to provide an annualized return of approximately 10%, while investors await a return to a more reasonable price to book valuation to deliver an exceptional capital gain.
Citigroup is a bargain
Citigroup Inc. (NYSE:C) is another major bank trading below book value at a 74% ratio. This stock would have to rise 35% in order to reach liquidation value, and could double without being considered expensive by industry standards. In addition, while it has a dividend yield of only 0.09%, its payout ratio is a minuscule 2%, leaving a great deal of room for increases.