Today I wanted to highlight five high-yield dividend stocks that also have a very cheap price. They sell well below the company’s tangible book value per share. In addition, the companies have low price-earnings (P/E) multiples.
Selling below tangible book value means that the stock is below shareholders’ equity after deducting intangible assets. Typically these assets are things like the value of patents and written up technology assets. It also includes things like goodwill (overpayments of fair value from prior acquisitions), as well as deferred expenses or charges.
This means that the value left is only tangible assets like real estate, cash, securities, loans, etc. Values can be put on these kinds of assets more easily than intangibles. In addition, all liabilities are deducted to determine the net tangible book value.
Therefore, if the high-yield dividend stocks are selling well below these levels, you know you are getting a bargain. This is the original theory that Benjamin Graham taught in his books and popularized with The Intelligent Investor. That is the book that Warren Buffett used to start his career as an investor.
In addition, I have modeled out three ways of valuing each of these stocks. These three methods are based on the historical dividend yield of the stock, the historical P/E ratio and the historical price-to-tangible book value per share (TBVPS).
The five high-yield dividend stocks selling below their TBVPS are:
- Prudential Financial Group (NYSE:PRU)
- CIT Group (NYSE:CIT)
- Hancock Whitney Corp. (NASDAQ:HWC)
- DCP Midstream (NYSE:DCP)
- Associated Banc-Corp (NYSE:ASB)
Let’s dive in and look at these stocks.
High Yield Dividend Stocks Selling Below Tangible Book Value: Prudential Financial (PRU)
Market Capitalization: $25.6 billion
Prudential Financial Group is a major insurance company with eight lines of business. These include retirement products, annuities, life insurance and international, investment management, and pension products.
PRU stock has taken a hit during the Covid-19 pandemic. Therefore the stock is an incredible bargain. It now sells for less than 42% of its tangible book value per share (TBVPS). Moreover, TBVPS has been growing.
You can see this in the chart at the right. It shows that even though the TBVPS has been growing, the price of the stock has fallen this year.
Moreover, the company is still profitable. It is expected to earn $9.38 this year and $11.61 next year. This more than covers the annual dividend per share of $4.40.
We can value the stock based on its historical yield. According to Seeking Alpha, the average yield was 3.96% over the past four years. Right now the stock has an attractive dividend yield of 6.3%.
Therefore, taking the $4.40 dividend per share and dividing it by 3.95% returns a target price of $111.39. This is over 60% above today’s price.
Doing a similar calculation with the company’s historical P/E and its historical P/TBVPS, results in target prices of $101.47 and 143.34 per share, respectively. The average of these three target prices is $118.74 per share.
This provides an average upside target of 71% above today’s price. This is probably the most attractive of these high yield stocks.
Even if it takes two years for this expected 71% return to occur, the investor would still make 30.8% annually on a compounded basis. And if you add in the annual dividend yield of 6.3%, the total return will be over 37% annually.
That is more than sufficient for most patient value investors.
CIT Group (CIT)
Market Capitalization: $1.7 billion
CIT Group is the holding company for CIT Bank, which does both commercial and consumer banking. The commercial division makes asset-backed loans and real estate loans, and the consumer division provides traditional consumer loans and checking accounts as well as real estate loans. The company is based in New York City.
That could be one reason why the stock is so cheap. The quality of life there has definitely fallen. Now the stock is very cheap.
For example, it now trades for less than 37% of its TBVPS. That is incredibly cheap. You can see this in the chart at the right, which shows the dip recently of the P/TBVPS ratio.
Granted, the TBVPS took a dip this year. But the market’s over-reaction by falling to less than 37% of this number is too much.
Moreover, CIT is expected to be profitable next year, at $2.38 per share. That puts the stock on a prospective P/E ratio of just 7.7 times next years’ earnings at the time of this writing. Again, this is very cheap.
Add to that CIT stock’s 7.6% dividend yield and this is a bargain stock. Taking the stock’s historical dividend yield of 2.5%, results in a potential target price of $55.78, or 204% higher than today.
Moreover, its historical P/E and P/TBVPS multiples result in target prices of 53% and 140% higher. The average of all three of these target prices is $42.66, or 132% higher than today.
This is a very good bargain with plenty of margin of safety. This is especially true given how low it is selling below its tangible book value.
For example, if the expected return of 132% occurs over the next three years, the compound average return each year is 32.37%. And if you add in the annual dividend yield of 7.6%, the total return is about 40% each year for 3 years.
That is a truly satisfying expected return for most investors.
Hancock Whitney Corp. (HWC)
Market Capitalization: $1.7 billion
This is a small Mississippi based bank (Gulfport) with 217 offices around the state. There really is nothing else special about it other than that the stock is very cheap.
For example, the stock trades for 73% of its tangible book value per share. Moreover, the TBVPS has been growing, including during the first half of 2020.
You can see this in the chart at the right, where the red line representing the TBVPS is moving up. But the stock price has fallen. Therefore, the P/TBVPS is now at its lowest point in the past 5 years.
In addition, analysts expect the bank to earn $2.79 per share next year. This puts the stock on a cheap 7.2 times earnings at the time of this writing. Moreover, the dividend yield is very attractive at 5.4%.
The average dividend yield over the past four years has been 3.18%. This means that the stock is worth at least 69% more if it were to rise to the average dividend yield.
Moreover, the stock’s historical P/E ratio and P/TBVPS ratios result in an average target price is that 61% and 91% higher, respectively.
Therefore, on average, HWC stock is worth 74% more than today (Sept.16) at $34.87 per share. This represents a very good return for most long-term value investors.
The expected 74% return over the next two years represents a compound average annual gain of 31.9% annually. If you add in the 5.4% dividend yield, the total return is expected to be over 37% annually.
That is a great return for most investors.
DCP Midstream (DCP)
Market Capitalization: $2.2 billion
DCP Midstream, based in Denver, markets, trades, and stores natural gas liquids (NGL). The falling oil and gas prices have lowered the value of the company’s assets, including its net tangible book value per share.
However, the stock price has fallen too far. At $10.49 per share, it is now trading at just 43% of the tangible book value of $24.15. That is too cheap.
You can see the history of the price-to-TBVPS in the chart at the right. You can see that this is the cheapest ratio is has been at for the past five years, and possibly longer.
Moreover, the dividend yield is now very high, at 13.8%. In other words, you are getting paid to wait for the stock to rise to a more normal P/TBVPS ratio.
However, based on its historical dividend yield of 14.5%, the stock is only worth 1% more than today’s price.
But its other historical value ratios raise the value of the DCP stock. For example, its historical P/E ratio has been over 27 times, compared to today’s 9.2 ratio that is based on 2021 earnings. This means it is worth at least 200% more at $33.83 per share.
In addition, its historical P/TBVPS ratio has averaged 0.79 over the past five years. This means the stock should be worth $19.07 per share or 69% above today’s price.
The average of these three target prices is $21.44. That represents a potential gain of 90% above today’s stock price (Sept. 16).
Over the next two years, a 90% expected return would average 37.84% each year on a compound basis. If you add in the 13.68% dividend yield the total return would be over 51.5%.
Even if it took three years for this 90% upside could be reached, the average annual return would be 23.85% annually on a compound basis. Including the 13.68% dividend yield, the annual total return would still be 37.5% annually. These are great returns for most investors.
Associated Banc-Corp (ASB)
Market Capitalization: $1.9 billion
This is a traditional mid-Western conservative bank holding company with branches in Wisconsin, Illinois, and Minnesota. Basically farming country.
The stock is incredibly cheap. For example, it has a 5.3% dividend yield, a 2020 forward P/E ratio of 13 times, and trades well below its tangible book value per share.
In fact, its P/TBVPS ratio is just 83%. You can see the history of its P/TBVPS ratio in the chart at the right.
On average the stock should be trading at $27.16, or 87% above its present price, based on its historical dividend yield.
Moreover, based on its P/E ratio and P/TBVPS, the stock is worth $15.28 and $10.74 per share respectively. The average of these three target prices is $17.07 per share.
This is 27.2% higher than today’s price, as of Sept. 16. Therefore ASB stock offers a good bargain for value investors, especially since it is well below its tangible book value per share.
Over two years, that expected return would average 12.78% each year on a compound basis. Including the 5.4% dividend yield, the total return would be about 18.2% annually.
That represents a good return for most investors, although it is lower than the others shown above.
Summary – Dividend Stocks Selling Below Their Tangible Book Value
With this in mind, I have put together a summary of these numbers for each warrant and the SPAC stocks below.
You can see in the table below that these high yield dividend stocks sell below 56% of their tangible book value on average.
Moreover, the average dividend yield is almost 8%, at 7.7%. But more importantly, using our valuation methods, which rely on the historical yield, historical P/E and price-to-tangible book value ratios, the average upside is almost 79%.
Even if it takes two years for these returns to come to pass, the average annual return works out to 33.75% annually, on a compound return basis. Plus, if you add in the 7.7% dividend yields, the total return annually will be over 40% each of the two years.
In other words, sometimes it pays to be conservative and buy cheap dividend stocks.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.