Oakmark also noted that many investors are unnecessarily gun-shy of banks since the financial crisis, but that the landscape has changed so dramatically that former fears are unwarranted. Improved balance sheet quality, tighter underwriting standards, growing earnings, and better management teams characterize the banks of today. And there is still much room for improvement. Oakmark writes:
“With minimal help from higher interest rates, we believe JPMorgan (JPM), Citigroup (C), and Bank of America (BAC) are all selling for roughly 8x normalized EPS and are, or will be, in a significant excess capital position within the next 12 months. At this price, the banks are theoretically in a position to grow their EPS at a high single-digit rate through share repurchase alone while increasing their dividend to a more normal 30% payout ratio, without loan growth, a normalization in interest rates, or release of any existing excess capital – all of which would only add to earnings power. This scenario would provide an attractive total return even before well-deserved multiple expansion.”
Furthermore, rules blocking the banks from increasing their dividend payouts may ease soon, unlocking the higher earnings for shareholders.
Understandably, other value investors eye the financial sector favorably. According GuruFocus’ All-In-One screener, these financial companies were the most bought by gurus in the first quarter: Wells Fargo & Co. (WFC), Citigroup Inc. (C) and American International Group Inc. (AIG).
Wells Fargo (WFC)
In the first quarter, four gurus began and eight gurus added to their positions in Wells Fargo. The largest new position was that of David Abrams (Trades, Portfolio), who bought 2.77 million shares of the stock, making up 9.9% of his total assets managed. Louis Moore Bacon (Trades, Portfolio) made the largest increase to his position, buying 2 million shares, working out to a 17,400% increase. After the increase, the holding represents 2% of his total assets.
Earnings per share have been increasing at Wells Fargo for the past four consecutive quarters, and were up 14% from the previous year to $1.05 in the first quarter. Net income also rose by 14% to $5.9 billion. Revenue was $20.6 billion, compared to $20.7 billion for the corresponding year-ago quarter, due primarily to two fewer days in the quarter. The company’s balance sheet also strengthened to reflect an 11.36% common equity Tier 1 ratio, increased from 10.8% in Dec. 2013 and 10.39% in first quarter 2013.
Regarding shareholder payouts, Wells Fargo repurchased 33.5 million of its shares during the quarter, and approved another 350 million share repurchases. The company increased its dividend to $0.30 per share from $0.25 a year previously. Wells’ 2014 Capital Plan also received approval from the government on March 26, allowing it to increase its dividend rate to $0.35 per share for second quarter 2014.
The bank trades on Thursday with a P/E around 12.7, P/B around 1.7 and P/S around 3.36, which is near a 10-year high.
Four gurus purchased new Citigroup stakes and 15 added to existing stakes in the first quarter. The largest new stake was purchased by Bill Nygren (Trades, Portfolio), who bought 3.6 million shares, representing 1.4% of his assets managed. Louis Moore Bacon (Trades, Portfolio) again increased his stake the most, by 80.8%, to 2.3% of his assets.
In the first quarter, Citigroup reported net income of $3.9 billion, or $1.23 per diluted share, compared to net income of $3.8 billion, or $1.23 per share, in the year-ago quarter. Its revenue was $20.1 billion, down slightly from $20.2 billion. The bank also ended the quarter with a Tier 1 Common ratio of 10.4%, up from 9.3% in the prior-year period.
Citigroup’s dividend has remained $0.01 since 2011. On April 23, the company announced that it authorized a $1.165 billion share repurchase program, good through the first quarter of 2015, tied to the approval of its Comprehensive Capital Analysis and Review (CCAR). The intent of the repurchase is to offset dilution by its annual incentive compensation grants.
On Thursday, Citigroup has a P/E ratio of 11.1 and P/B around 0.74, which are both near their respective one-year lows. It has a P/S ratio around 1.95.
American International Group Inc. (AIG)
Two gurus began new AIG positions and eight reported increasing existing positions.
The largest new buy of AIG in the first quarter was made by George Soros (Trades, Portfolio), who picked up 45,000 shares, a marginal fraction of his portfolio. Andreas Halvorsen (Trades, Portfolio) made the largest increase to his holding, increasing it by 635.26% with the purchase of 5,463,338 shares, for a total holding of 6,323,360 shares.
For the first quarter AIG reported net income of $1.6 billion, down from $2.2 billion in the prior-year quarter. Diluted earnings per share also declined to $1.09, from $1.49.
The company used $867 million to repurchase 17.4 million shares in the first quarter, leaving $537 million under its repurchase authorization. On June 5 it built on its repurchases by approving an additional $2 billion in funds for buy backs, due to the sale of its International Lease Finance Corporation and capital position.
AIG restarted its dividend in third quarter 2013 for $0.10 per share quarterly. In the first quarter, the company edged it up to $0.13 per share.
On Thursday, AIG is trading with a P/E ratio of 9.5 and P/B ratio of 0.8. Its P/E ratio of 1.28 is around a five-year high.
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