This week, well-known value managers Oakmark Funds issued
outlining the rationale for their outsized investments in U.S.
banks, in spite of the negative press the institutions have
received for over six years since the financial crisis. "The short
answer," they wrote, "is we find their risk profiles are much
improved, along with management (where needed), and the valuations
are quite attractive."
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
"With minimal help from higher interest rates, we believe JPMorgan
), Citigroup (
), and Bank of America (
) 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
Understandably, other value investors eye the financial sector
favorably. According GuruFocus'
, these financial companies were the most bought by gurus in the
first quarter: Wells Fargo & Co. (
), Citigroup Inc. (
) and American International Group Inc. (
Wells Fargo (
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
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
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
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. (
Two gurus began new AIG positions and eight reported increasing
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
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.
For more financial stocks heavily bought by gurus,
use the screener set up here
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