U.S. financial stocks have scored big gains since Donald Trump's surprise election victory. The combination of expected higher interest rates and reduced regulation of the sector has triggered big gains in the shares of banks, insurance companies, and other financial institutions.
Most investors are well aware of the big financial giants south of the border – companies like JPMorgan Chase, Morgan Stanley, Wells Fargo, MetLife, etc. But here's a suggestion you may not be familiar with.
Principal Financial Group (NYSE: PFG)
The business: Principal Financial is a major U.S. financial services company with almost $600-billion in assets under management. Its wealth management services include trusts, insurance, and mutual funds plus a range of services for employers, including group benefit plans, retirement plans, and business planning and protection solutions. The company has international offices and subsidiaries in Asia, Europe, and Latin America.
The security: I recommend the company's common stock, which trades on the New York Stock Exchange under the symbol PFG.
Why I like it: The election of Mr. Trump has proven to be bullish for financial stocks as investors anticipate higher growth in the U.S. and an increase in interest rates. This stock has moved up by more than $3 since voting day, but it still looks reasonably valued and offers a steadily increasing dividend.
Financial highlights: The company reported very solid third-quarter results on Oct. 27. Assets under management were $595.8-billion, up 15 per cent on the trailing 12-month basis. That's a new record for the firm. Net income available to common shareholders increased 3 per cent for the quarter, to $308.2-million compared with $300.4-million in the third quarter of 2015. On a per share basis, earnings were $1.06 (fully diluted) compared with $1.01 in the same period last year.
For the first nine months of the fiscal year, the company reported net income available to common shareholders of $1.25-billion ($3.41 per share) compared with $1.23-billion ($3.20 per share) last year. The 6.6-per-cent gain in per share earnings is due in part to an active stock buyback program that reduced the weighted average common shares outstanding by 4.8 million over the first nine months of the year.
Risks: A weak economy, low interest rates, and a bear market negatively affect wealth management stocks. These do not appear to be significant risks at this time. However, the current price is a bit of a concern. The stock has had a strong run and is trading near its all-time high. Conservative investors may want to watch it for a while and buy on pullbacks.
Dividend policy: While the yield may not look high, this company is a proven dividend grower. In October it announced an increase of $0.02 per share in the dividend, to $0.43 per quarter starting with the Dec. 27 payment. This marks the third quarter in a row that the dividend has gone up. Over the past year, the quarterly payment has increased by 13 per cent. Since the end of 2013, it is up 65 per cent.
Tax implications: There is a 15 per cent withholding tax on dividends, unless the shares are held in a retirement plan (RRSP or RRIF). Shares held in a TFSA are not exempt from the tax.
Who it's for: This stock is suitable for investors seeking U.S. cash flow who are willing to accept a moderate degree of risk.
How to buy: Principal Financial is actively traded in New York with over a million shares changing hands on a typical day. You will have no problem being filled.
Summing up: The future looks a lot brighter for financial companies than before the Trump victory. The solid growth of this company and its commitment to share buybacks and dividend increases make it a sound choice.
Ask your financial advisor if the stock is suitable for your account.
(Disclosure: I do not own this stock)
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.