Financial Favorites for Value and Yield

08/02/2013 7:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Even with the current high stock market, I continue to find undervalued gems; two of my latest recommendations are in the financial sector, explains J. Royden Ward of Cabot Benjamin Graham Value Letter.

Royal Bank of Canada (RY), founded in 1864 in Toronto, and also known as RBC, is the fifth largest financial institution in North America, and the largest bank in Canada.

RBC offers all types of banking and investment services to individuals and businesses through its 1,700 branch offices in Canada and 400 branches in 30 foreign countries.

RBC recently sold its 420 US branches and its US banking network to PNC for $3.5 billion. The sale will enable RBC to expand its Canadian operations, and to make strategic acquisitions at home and abroad.

Indeed, RBC purchased the remaining 50% ownership in RBC Dexia Investor Services for $1 billion. Royal Bank also bought part of the wealth management division of Royal Bank of Scotland. Finally, RBC acquired the Canadian auto finance and deposit business of Ally Financial in February 2013 for $3.5 billion.

The Canadian economy has faltered slightly in 2013 as a result of weak production from one of Canada's key industries, mining. However, RBC registered an EPS increase of 8% during the 12 months ended 4/30/13.

Increased business in wealth management and securities underwriting will continue to help results during the next 12 months. At 10.3 times forecast 12-month EPS of 5.63, RY shares are undervalued.

The recently increased dividend now provides shareholders with a generous yield of 4.4%. The high yield and strong balance sheet will limit stock price volatility.

Meanwhile, AllianceBernstein (AB) has begun a major turnaround. The company produced weak sales and earnings from 2008 through mid-2012, caused by poor investment advice to its debt and equity institutional clients.

During the past 12 months, though, the company's investment advice to clients has been among the best in the industry. The new success has attracted many new clients seeking market-beating returns in the equity and debt markets.

Recent reports have raised concerns that the company's advisory service to bond clients will suffer, because of the Fed's tapering of its bond-buying program. I believe institutional investors, who are required to invest in bonds, will seek AllianceBernstein's superior advisory services.

Institutional investors, who are able to switch from bonds to stocks and other investments, will also seek the company's stock advisory services, where it is establishing an even stronger record in stock investing.

I look for revenues to advance 8% and EPS to jump 25% during the next 12 months ending 6/30/14. The current weakness in the stock price presents an excellent buying opportunity.

I expect AB to pay quarterly dividends totaling $1.60 or more during the next 12 months, which is well covered by my forecast 2.60 cash flow per share for 2013. The dividend yield of 7.8% is too good to pass up.

Based on our Modern Value Analysis strategy, our minimum sell price target is $33.51; we recommend purchase at $23.47 or below.

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