The 7 Highest Potential Returns in Thrifts and Mortgage Finance

In a private speech to the Financial Planning Association, legendary Vanguard founder and former CEO John Bogle made an absolutely critical observation about where the best stock returns come from -- and how to find the next great stock to buy.

He told the assembled guests that only three things drive investor returns:

  • Dividends
  • Earnings growth
  • Changes in valuation

Historically, stocks have returned 9.6% per year on average -- 5%, 4.5%, and 0.1% from dividends, earnings growth, and valuation changes, respectively. Naturally, the best stocks produce the highest combined return.

So which thrifts and mortgage finance stocks will earn investors the best returns today? Obviously, no one knows for sure. You should always take future estimates with a grain of salt, particularly when analyst forecasts are involved. In fact, studies show that analysts' long-term earnings-per-share estimates tend to be over-optimistic by roughly 40%, so I've reduced their estimates accordingly.

But investing is all about making predictions based on imperfect knowledge of the future. So long as we're aware of the need to think critically about a company's prospects and to build a margin of safety into our stock purchases, analyst estimates can be a helpful tool for generating ideas. By running the numbers, we can round up the stocks that represent their implied best buys today. Here are our assumptions:

Company

Dividend Yield (current)

5-Year Growth Rate (reduced by 40%)

Price-to-Earnings Ratio (in 2016)

Dime Community Bancshares (Nasdaq: DCOM  )

5.0%

5%

13

OceanFirst Financial (Nasdaq: OCFC  )

4.1%

6%

15

Flushing Financial (Nasdaq: FFIC  )

4.9%

4%

13

New York Community Bancorp (NYSE: NYB  )

8.4%

4%

12

Viewpoint Financial (Nasdaq: VPFG  )

1.7%

9%

18

Astoria Financial (NYSE: AF  )

5.6%

2%

11

United Financial (Nasdaq: UBNK  )

2.4%

9%

18

Data from Capital IQ, a division of Standard & Poor's. Includes stocks on major U.S. exchanges capitalized at more than $200 million, with positive earnings and at least one analyst issuing long-term earnings estimates.

And here are their implied five-year annualized returns for shareholders. I've ordered the three return components by their reliability -- first dividends, then earnings growth, then valuation.

Company

Dividend Return*

Earnings Growth Return

Valuation Return

Implied Cumulative Annual Return

Dime Community Bancshares

5%

5%

10%

20%

OceanFirst Financial 

4%

6%

8%

18%

Flushing Financial 

5%

4%

9%

19%

New York Community Bancorp 

8%

4%

4%

15%

Viewpoint Financial 

2%

9%

2%

13%

Astoria Financial 

5%

2%

2%

10%

United Financial 

3%

9%

(4%)

8%

Source: Author's calculations.
*Assumes dividend growth at rate of earnings growth.

The raw numbers tell us that these are the seven most promising names among thrifts and mortgage finance. Of course, analysts' growth assumptions for any individual company could prove overly optimistic or pessimistic, as could their future valuations, so the implied cumulative returns are hypothetical. With banks in today's environment, it's also worth considering loan growth, credit quality, and price-to-book valuations. (I've written before about how one of the names on this list -- New York Community Bancorp -- fares in these areas.) That said, this list helps you focus on this sector's highest potential returners -- and provides an excellent starting point of names for further research.

Don't stop here. If any of these stocks interest you, add them to your personalized stock watchlist to find out more about it. If you haven't started a watchlist yet, click here to begin.

Ilan Moscovitz doesn't own shares of any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1551770, ~/Articles/ArticleHandler.aspx, 10/21/2014 6:58:19 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement