While finding value in this market can be tricky, it is not impossible. We will examine three companies trading with a reasonable valuation against their own historical average and to that of their respective peer groups. Each name also comes with a dividend yield that is at least twice that of the S&P 500 index.
Citigroup
Citigroup Inc. (C, Financial) is one of the largest financial institutions in the world. The company offers consumer and corporate banking along with investment banking, asset management and insurance services. Citigroup generated revenue of $74 billion in 2020 and is valued at nearly $140 billion today.
Citigroup receives a 9 out of 10 on its valuation rank from GuruFocus. Citigroup’s trailing price-earnings ratio tops 72% of the 1,368 companies in the banking industry. It is also near the low end of the company’s range over the last decade.
The same is true for nearly every other valuation metric. Citigroup bests more than 76% of the competition for both forward price-earnings ratio and price-to-owner earnings, the latter of which is at the very bottom of the company’s long-term average. The company also scores well on price-book and price-sales ratios, though both are mid-range for Citigroup’s historical performance. The price-to-free cash flow is middling compared to the rest of the industry, but ranks well compared to the company’s previous results.
Citigroup closed Friday’s trading session at $67.61 and has a GF Value of $74.17, giving the stock a price-to-GF Value of 0.91. Shares are rated as fairly valued by GuruFocus, but could return 9.7% were they to reach the GF Value.
In addition, shares of Citigroup pay a 3% dividend yield today, which could push total returns into the low double-digit range. The current yield looks very good against the stock’s five-year average yield of 2.3% and to the 1.4% average yield for the S&P 500 index. Investors are likely to recall that the company did cut its dividend in both 2008 and 2009 before eliminating it in 2010 during the Great Recession, so the stock is not without risk. However, the company has raised its dividend for six consecutive years and with a compound annual growth rate of 53% over this period of time. Growth over the last three years is just under 10%.
H&R Block
H&R Block, Inc. (HRB, Financial) is a leading consumer tax services provider. The company operates mostly in the U.S., but does have a small presence in Canada and Australia. H&R Block has 12,000 company-owned and franchised locations and also provides tax software. The company generated $3.4 billion in fiscal year 2021 (which ends April 30) and has a market capitalization of $4.3 billion.
H&R Block scores a perfect 10 out 10 on valuation rank. With a price-earnings ratio of 7.5, H&R Block outpaces 93% of the 57 companies contained within the personal services industry. This is also at the very low end of the long-term range. The forward price-earnings ratio is a bit higher at just under 8, but ranks better than 89% of peers.
The stock looks cheap on a number of other valuation methods as well. Enterprise-value-to-Ebit and enterprise-value-to-Ebitda are both above those of companies in the same industry and attractive compared to H&R Block’s own history. Price-to-free cash flow also looks attractive.
GuruFocus estimates that H&R Block has a GF Value of $28.29. With shares closing the most recent trading session at $23.56, the stock has a price-to-GF Value of 0.83. The stock is rated as modestly undervalued and could see a return of 20% if H&R Block were to reach its GF Value.
Prior to pausing it last year, the company had raised its dividend for six consecutive years. The company also recently announced a dividend increase for early July. H&R Block yields 4.6%, above its 10-year average yield of 3.8%. Today’s yield is considerably higher than what the stock normally offers. To put this into context, this would be the stock’s second-highest average since at least 2005 if H&R Block were to average the current yield for the entire year. Added together, total returns could be as high as the mid-20% range.
Mercury General
Mercury General Corp. (MCY, Financial) provides automobile, homeowners, renters and business insurance. The company’s automobile insurance makes up a bulk of revenue. Mercury General has a presence in 11 U.S. states, most notable of these is California. The company’s revenue totaled $3.6 billion in 2020 and has a market capitalization that exceeds $3 billion.
Mercury General also receives a 10 out of 10 on valuation rank. The stock sports an incredibly low valuation in the low 5 times earnings range. This is a lower price-earnings ratio that 90% of the 428 companies in the insurance industry. It also is at the very bottom of the stock’s valuation range for the last 10 years. The forward price-earnings ratio also ranks much better than peers.
Enterprise value-to-Ebit and Enterprise value-to-Ebitda are also well above peers, with the latter being much better than Mercury General normally produces. The PEG ratio is lower than almost every other name in the insurance industry. The price-book ratio is Mercury General’s weakest score, but still tops 62% of the competition and is the in the middle of the stock’s long-term history.
Mercury General trades hands at $58.31 at the moment and has a GF Value of $59.13, giving the stock a price-to-GF Value of 0.99. This doesn’t leave much upside potential in the stock compared to its intrinsic value and shares are rated as fairly valued.
However, Mercury General does pay a 4.7% dividend yield and has increased its dividend for 33 consecutive years. Investors looking for a reasonably valued, income-producing name with a demonstrated history of dividend growth could find Mercury General attractive.
Final thoughts
Citigroup, H&R Block and Mercury General are three examples of stocks that are more than reasonably valued, especially when compared to their respective peer groups and to their own past performance. All three also offer yields that are superior to the S&P 500 Index. Citigroup and H&R Block also could see at least double-digit declines if they were to trade with their GF Values. Mercury General appears to be priced appropriately, but does come with the benefit of a high yield and more than three decades of dividend growth. Investors looking for value and yield are encouraged to consider any of these three stocks for investment.
