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Nathan Parsh
Nathan Parsh
Articles (213) 

5 Undervalued Financial Stocks That Could Trade Higher

Value can be difficult to locate, but these financial stocks trade below their long-term average valuations

Finding value continues to prove tricky in this market, with the S&P 500 trading with an average price-earnings ratio north of 22.

One area of the economy that appears to offer plenty of value is the financial sector. In this article, we will look at five companies in the financial sector that are trading below their long-term average price-earnings ratios. Shareholders could be looking at significant gains if each respective stock were to eventually trade at its average valuation. Each of these stocks also offers a yield above that of the S&P 500.


Of all the property and casualty insurance companies, Allstate Corp. (NYSE:ALL) is the second-largest in the country. The company is also among the leading life insurance providers in the U.S. Allstate provides automobile, homeowners and other personal insurance. The company also sells annuity, term, universal and whole life insurance products to customers. Allstate’s counts Allstate, Encompass and Esurance among its insurance brands. The company has a market cap of $31 billion as of the writing of this article.

Shareholders of Allstate received an 8% dividend increase for the April 1 distribution. This gives the company 10 consecutive years of dividend growth. Allstate’s dividend has increased with a compound annual growth rate, or CAGR, of 11.1% and 9.6% over the past five and 10-year periods of time, respectively.

The stock currently has a dividend yield of 2.2%, slightly ahead of Allstate’s 10-year average yield of 2.1% and the 1.9% average yield for the S&P 500. The stock has an annualized dividend of $2.16 and is predicted by Wall Street analysts to have $10.86 in earnnigs per share for 2020. This equates to a payout ratio of just 20% for the year, lower than the 10-year average payout ratio of 26%.

Allstate closed Tuesday’s trading session at $99.12. Using expected EPS for 2020 gives the stock a forward price-earnings ratio of 9.1. This compares favorably to the average price-earnings ratio of 12.1 that the stock has had since 2010. However, this includes one year (2011) where the price-earnings ratio was above 21. Removing this from the average, the average ratio falls to 11.1.

Allstate has a solid dividend growth streak going with nearly double-digit dividend growth over the last decade. The stock is also below its average valuation. If shares were to rise to its average earnings multiple, the stock could return almost 22% from the current price in addition to the dividend yield. This total return possibility makes Allstate an excellent option for value and income investors, in my view.

Bank of New York Mellon

Bank of New York Mellon (NYSE:BK) is a global financial services company that can trace its roots back to the early days of the U.S. Bank of New York Mellon provides wealth and asset management services and issuer services to institutions and corporations in 36 separate countries. Bank of New York Mellon has a market capitalization of $34 billion.

Bank of New York Mellon raised its dividend by 10.7% for payment made Aug. 9, 2019. The bank typically raises its dividend following the June stress test that major financial companies undergo. Bank of New York Mellon has nine years of dividend growth. The bank’s CAGR over the last half-decade is 11.1% while the 10-year rate is 12.6%.

Shares of Bank of New York Mellon yield 3.2% at the moment, ahead of the stock’s 10-year average yield of 1.9%. The annualized dividend of $1.24 equates to a payout ratio of 34% using analyst estimates for EPS of $3.67, slightly higher than the 26% average payout ratio that Bank of New York Mellon has had since 2010.

Bank of New York Mellon trades hands at $38.72. Using EPS predictions for the year, the stock has a forward price-earnings ratio of 10.6. The 10-year average price-earnings ratio is 13.5. If shares were to reach the long-term valuation then investors could reap a return of 28% from the current price. Investors looking for an above average yield from the financial sector could do well owning Bank of New York Mellon.

The Hartford Financial Services Group

The Hartford Financial Services Group (NYSE:HIG) is a provider of property and casualty insurance as well as individual life insurance and annuities. The company also has an asset management and employee benefits business. Hartford Financial trades with a market capitalization of nearly $15 billion.

Shareholders of the company received an 8.3% dividend increase for the April 2 payment. This is slightly lower than the five-year average dividend raise of 9%, but significantly below the 10-year average raise of 19.6%. The company has now increased its dividend for the past 10 years.

Hartford Financial offers a dividend yield of 3.1%. This is a superior yield compared to its10-year average yield of 1.8%. The company has an annualized dividend of $1.30 and is expected to earn $4.62 per share this year, which equates to a payout ratio of 28%. While this is higher than the 10-year average payout ratio of 21%, Hartford Financial's dividend appears to be well covered by earnings.

The stock closed the most recent trading session at $41.49, giving shares a forward price-earnings ratio of 9 when using projected EPS. Shares have averaged a multiple of 11.1 since 2010.

Hartford Financial appears to be undervalued today. For context, if shares were to average the current valuation for all of 2020 then it would be the stock’s lowest average price-earnings ratio since 2013. Reverting to this average valuation would mean a nearly 24% return based off the most recent closing price. This return combined with a solid dividend yield earn the stock a buy recommendation in my opinion.

Principal Financial Group

Principal Financial Group (NASDAQ:PFG) offers savings, insurance, retirement and investment services to its more than 19 million customers. The company has been in existence since 1879 and has a market capitalization of more than $12 billion.

Principal Financial most recently increased its dividend by 1.8% for the March 27 payment. This trails the stock’s five and 10-year CAGRs of 7.8% and 14.8%, respectively. Principal Financial has now increased its dividend for the past 12 years.

Despite the lackluster dividend growth of the most recent increase, Principal Financial yields 5.1% today. This is the highest yield of the companies on this list and well ahead of the stock’s 10-year average yield of 3.1%. Principal Financial’s annualized dividend is $2.24 and the analyst community expects the company to earn $4.90 per share in 2020. This gives Principal Financial a payout ratio of 46%. The heightened payout ratio is still very much in a safe range, so I believe the dividend to be safe.

Principal Financial closed Tuesday’s session at $44.20. Using expected EPS, the stock has a price-to-earnings ratio of 9. Principal Financial has an average price-to-earnings multiple of 9.4 over the last decade.

Trading at its average valuation would offer a return of just 4.2% from the current level for Principal Financial. While shareholders may not receive much in the way of capital gains by owning the stock at the current price, the bountiful dividend yield should help bring about a solid total return.

Sun Life Financial

Toronto, Canada based Sun Life Financial Inc. (NYSE:SLF) offers a wide range of financial services, such as insurance, annuities and investment management. The company also provides customers with banking services. Sun Life Financial is valued at just under $22 billion.

Sun Life Financial raised its dividend by 4.8% (in Canadian dollars) for the Dec. 31, 2019 payment. This is the fifth year in a row that the company has raised its dividend after maintaining the same payment from 2008 through 2014. U.S. investors have had an average increase of 7.2% over the past five years.

Shares of Sun Life Financial yield 4.3%. The company is expected to pay $1.60 in dividends per share while generating $3.63 in EPS this year for a payout ratio of 44%. This is lower than the average payout ratio of 47% that shares have had since 2010.

Sun Life Financial closed the most recent trading session at $37.42, which equates to a price-earnings ratio of 10.3 using 2020 estimates. This compares favorably to the stock’s  average earnings multiple of 11.3 over the past decade Reaching this valuation could result in a 9.6% gain from the most recent close.

Sun Life Financial has the shortest dividend growth streak among the companies discussed in this article, but that doesn’t mean investors should shy away from the name. Sun Life Financial has an expected payout ratio below its long-term average payout ratio. 

Final thoughts

Allstate, Bank of New York Mellon, Hartford Financial, Principal Financial and Sun Life are all undervalued compared to their respective historical valuations. Each stock also offers a solid dividend yield, led by Principal Financial’s 5% yield. Each stock, outside of Principal Financial, has the potential for double-digit capital gains if shares were to trade with the long-term average valuation. Investors looking for value and income might consider each of these names as a strong investment.

Author disclosure: the author has no position in any stocks mentioned in this article.

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About the author:

Nathan Parsh
I am originally from the Detroit, Michigan area, before moving to Maryland to begin a career as an educator. This is my 15th year teaching. My wife and I have two young children who keep us on our toes.

Rating: 4.0/5 (1 vote)



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