Big banks are back. Many big-bank stocks have nearly doubled over the past two years, and the companies' prospects look bright, thanks to an improving economy, an uptick in business lending, better loan quality and cleaner balance sheets. "We should see stronger growth and fewer credit problems," says Joseph Morford, an analyst with RBC Capital Markets. "The broad economy is improving, and a big part of a bank's success is tied to the health of its operating markets."
To be sure, the stocks are still well below where they were before the financial crisis struck five years ago. For example, Citigroup (symbol C), which closed at $42.77 on April 4, sold for as much as $551 in 2007 (adjusted for a one-for-ten reverse split in 2011). But Citi may be the most promising of the big-bank stocks, says Raymond James analyst Anthony Polini. In the midst of a miserable 2012, during which Citi's profits dropped sharply, the New York City-based bank ousted its CEO last fall and rejiggered the entire management team a few months later. New CEO Michael Corbat takes every opportunity to stress that the bank is leaner and more focused on cutting costs and managing risks than ever, and that it is nothing like the company that posted massive losses a few years ago.
Citi's finances have improved so much that the company recently announced plans to buy back up to $1.2 billion worth of stock. Citi apparently isn't ready, however, to pay a meaningful dividend. The bank pays out only 4 cents per share, and the stock yields a piddling 0.1%.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Analysts expect Citi's earnings to grow about 12% annually over the next three to five years. Citi can goose profits by trimming unnecessary expenses, says Polini. "There is a lot of dry powder at Citi that some of the better-managed companies don't have," he says. The profit growth should boost the stock, which trades at 9 times estimated 2013 earnings of $4.61 per share. Polini expects the stock to hit $52 within a year.
The hottest big-bank stock of late has been Bank of America (BAC). Since hitting $4.99 in December 2011, the stock has soared 139%, to $11.94. Bank of America is slowly working through the disastrous results of a decade of acquisitions, which culminated in the 2008 purchase of Countrywide Financial Corp. The acquisition of the troubled mortgage lender put BofA on the wrong end of massive loan losses and a seemingly endless stream of litigation filed by everyone from shareholders to the Justice Department. However, even after paying the Federal National Mortgage Association $2.7 billion late last year as part of another legal settlement, the bank posted earnings for all of 2012 that were nearly three times higher than those of the previous year.
Strong results and the belief that BofA's woes are finally winding down have driven the stock's ascent. But don't look for it to keep advancing at the same rate. Morford thinks the Charlotte, N.C.-based bank's shares will hit $14 within a year. The stock sells for 12 times predicted 2013 earnings of 99 cents per share. That seems pricey for a bank stock, but it looks fair in light of expected annual earnings growth of 19% over the next few years. BofA shares yield an inconsequential 0.3%.
Shares of JPMorgan Chase (JPM) continue to be held back by a London trading debacle that cost the bank a whopping $6.2 billion, says analyst Erik Oja, of S&P Capital IQ. Although a congressional report was highly critical of the company's leadership, including chairman and CEO Jamie Dimon, Oja considers JPMorgan to be among the nation's best-managed banks. "It is still one of the top investment banks in the world and is likely to have good growth," he says. At $47.49, the stock sells for 8.7 times estimated 2013 earnings of $5.48 per share. Oja considers JPMorgan a bargain and thinks it will hit $55 in a year. The stock, incidentally, yields an above-average 3.2%.
If you're looking for safety in a big-bank stock, your best bet is Wells Fargo (WFC). It's the biggest of those mentioned in this story (market capitalization: $193 billion), it is arguably the best-managed, and it has done best at staying out of trouble. Its stock, now $37.42, is closer to its pre-financial-meltdown high than any other company on this list. As a result, Wells is a bit more expensive than the other big-bank stocks, particularly in relation to future earnings growth, and that's why Oja isn't recommending it. The shares trade at 10 times estimated 2013 earnings of $3.65 per share, and analysts forecast long-term earnings growth of 10% a year. The stock yields 2.7%.
There's also opportunity in a big bank that follows a different path than others on this list. Capital One Financial (COF) is one of the nation's biggest credit card issuers and may be best known for its tongue-in-cheek commercials featuring Alec Baldwin and former basketball star Charles Barkley. The bank's earnings were up nearly 12% last year, but earnings per share declined because the number of shares outstanding rose after the completion of two mergers in 2012. The mergers turned Capital One into one of the nation's largest banks by deposits, but its market capitalization of $31.8 billion is only one-fourth that of Citi and BofA.
Capital One focuses more on consumers and less on businesses than the other banking behemoths. It generates about three-fourths of its income from credit cards and consumer loans. The improving financial health of the consumer sector is driving down Capital One's default rates and is helping to put the company in a position to meet increasingly stringent regulatory capital requirements well ahead of schedule.
In fact, the bank is so well capitalized that regulators recently gave it permission to hike its quarterly dividend sixfold, to 30 cents per share. At $55.07, the stock yields 2.2% on the new dividend rate and sells for 8.6 times projected 2013 earnings. That's below Capital One's estimated long-term earnings growth rate of 9.3% a year, suggesting that the stock is undervalued. RBC analysts believe the shares will reach $67 over the coming year.
-
Quiz: How Much Do You Know About Taxes on Social Security Benefits?Quiz Social Security benefits often come with confusing IRS tax rules that can trip up financially savvy retirees and near-retirees.
-
Are You Ready for 65? The Medicare Initial Enrollment Period QuizQuiz Turning 65 soon? Test your basic knowledge of Medicare's Initial Enrollment Period (IEP) rules in our quick quiz.
-
3 Ways to Stretch the 2026 Social Security COLA For Your BudgetThree steps retirees can take to stretch the Social Security COLA to fit their budgets.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
-
If You Put $1,000 into Qualcomm Stock 20 Years Ago, Here's What You Would Have TodayQualcomm stock has been a big disappointment for truly long-term investors.
-
If You'd Put $1,000 Into Home Depot Stock 20 Years Ago, Here's What You'd Have TodayHome Depot stock has been a buy-and-hold banger for truly long-term investors.
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
-
If You'd Put $1,000 Into Oracle Stock 20 Years Ago, Here's What You'd Have TodayORCL Oracle stock has been an outstanding buy-and-hold bet for decades.
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have TodaySherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have TodayUNH stock was a massive market beater for ages — until it wasn't.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have TodayBerkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
