Following the release of its fourth-quarter and full-year earnings report for 2021, the investment bank Jefferies Financial Group (JEF 3.23%) hiked its quarterly dividend to $0.30. With its current share price recently dipping to about $38, that gives Jefferies an attractive dividend yield of nearly 3.2%. After the increase, does Jefferies belong in your portfolio as a dividend stock? Let's take a look.
The state of the business
Jefferies provides all of the traditional investment-banking and capital-markets businesses including mergers-and-acquisitions (M&A) deals, equity and debt underwriting, corporate lending, equities sales and trading, prime brokerage services, fixed-income capital markets through the trading of various bonds, derivative instruments, and foreign-exchange trading. Jefferies also offers asset and wealth management and merchant banking services. In 2021, the bank had its best year ever, generating net earnings of nearly $1.7 billion on net revenue of almost $8.2 billion.
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Investment banking revenue surged in 2021, as the bank announced or completed over 100 M&A deals that were more than $1 billion each. Meanwhile, capital markets revenue fell from the insane year in 2020. Equity capital markets, however, remained strong, up 15% from 2020, while fixed income declined 28%, although none of this is particularly unique for the industry in 2021. In its most recent letter to shareholders, management said Jefferies continues to pick up market share in its capital markets businesses.
For 2022, the picture doesn't look bad, either. "We expect deal activity to remain robust, while investors likely will be more cautious about growth companies that don't yet have a track record of positive unit economics," Dominic Lester, Jefferies' head of investment banking in Europe, recently told Financial News, referring to M&A activity. If the Fed raises interest rates quicker than expected and the economy slows, that could impact M&A activity, but at least for the first part of the year, M&A pipelines look promising. Fixed-income capital markets activity may also benefit in a rising-rate environment.
The quality of the dividend
Its 3.2% yield puts Jefferies ahead of some of the larger, more-popular investment bank stocks, albeit the yield will come down a bit if Jefferies' stock recovers from its recent dip after earnings. But it will still be at the top or near the top of the group. I would also point out that Citigroup will likely see its dividend yield come down because the stock is still currently trading at beaten-down levels.
MS dividend yield. Data by YCharts.
Jefferies' dividend payout ratio based on the new annualized dividend and earnings per share (EPS) of $6.13 in 2021 would be about 20%. That leaves plenty of room to grow the dividend because banks normally have a dividend payout ratio in the range of 25% to 40%. However, we know most investment banks had a big year in 2021. If we base the payout ratio on analysts' consensus EPS estimate for this year, which is currently significantly lower at $3.96, the payout ratio looks much higher at about 30% but is still well within the normal range for a bank.
While Jefferies has been paying a steady dividend only since 2018, it has quickly grown its quarterly dividend from $0.10 to $0.30 per share in just about four years.
Does it belong in your dividend portfolio?
It may not be one of the big investment banks you hear about, but Jefferies is definitely punching its weight, considering its size, market share position, and earnings results. Trading at about 9.5 times this year's projected earnings, Jefferies has a lower valuation than most of the larger, more popular investment banks. It also trades at the lower end of valuations based on price-to-tangible-book-value. (Tangible book value is what a bank would be worth if it were liquidated.) With a more than 3% dividend yield and some potential upside on valuation, I think Jefferies would make a nice addition to your dividend portfolio, especially if you are looking for an investment bank to balance out your holdings.
