At first glance, the financial sector may not look as exciting as some of the market's buzzier sectors like technology or biotech. But financials are a great place to look for value, and there are plenty of great companies trading at valuations that are worth getting excited about. Just ask Warren Buffett, who has benefited from making financial stocks a core part of his portfolio for years. Here are three cheap financial stocks that you can buy at a great price now and hold on to forever.
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Ally Financial
Value investors often describe value investing as "buying $100 bills for $80," and over the long run, that is a winning proposition. That's basically what you are getting by investing in Ally Financial (ALLY 1.35%). The leading online consumer bank trades at less than its book value. Book value is the sum of a company's assets minus its liabilities, so price-to-book value is calculated by dividing a company's market value by its book value. With a price-to-book value of 0.9, investors are essentially acquiring Ally for less than the total value of its assets would be worth if the company were to be liquidated, meaning that this is a rock bottom valuation with a large margin of safety for investors.
Shares of Ally are also cheap on a price-to-earnings (P/E) basis, trading at just 4.5 times earnings and less than five times next year's earnings. In fact, shares of Ally are so cheap that they recently caught the eye of the ultimate value investor: According to public filings, Buffett's Berkshire Hathaway, increased its position in Ally by 234%.
Ally is a lot more than just a cheap stock. The bank is also a great dividend payer, with a current yield of about 3.7%. The company has steadily raised its dividend over the last few years, and it accelerated the pace with a jump from a $0.19 quarterly payout per share in early 2021 to $0.25 later in the year and $0.30 at the start of 2022, good for a 57% increase in a bit more than one year. In addition to dividends, Ally Financial is also returning capital to shareholders via share buybacks. And this is no token sum -- Ally's board authorized a share buyback program of up to $2 billion, which is about 20% of the company's market value at today's price.
With this cheap valuation, attractive dividend yield, commitment to returning value to shareholders, and Buffett seemingly pounding the table for the stock based on his recent buying, something tells me that Ally won't trade for a rock-bottom valuation for long.
Capital One Financial
Virginia-based financial-services company Capital One Financial (COF 1.05%) offers credit cards, consumer banking, and commercial banking. Shares are down about 27% year to date as investors seem concerned that in a deteriorating economy, Capital One could suffer from higher loan losses. But at current prices, these risks seem more than priced into the stock. Trading at a price-to-book-value of just over 0.7, buying shares is literally like buying a $100 bill for $70. Capital One also looks attractive based on a P/E of less than 5.
Shares of Capital One yield well over 2% and, like Ally Financial, the company is also buying back shares. For the quarter ended in March, Capital One bought back $2.4 billion worth of shares, and for the quarter ended in June, Capital One bought back another $1.9 billion.
Capital One's board also authorized a new share buyback program of up to $5 billion that started in the third quarter of 2022.
While concerns about loan losses are understandable, at this point, Capital One looks too cheap to ignore, especially with the way the company is performing. During the most-recent quarter, revenue for the company's credit card segment was up 19% year over year, while transaction volume grew 12% and loans held for investment increased by 20%. Consumer banking loans grew by 9%, while commercial banking loans spiked 27%. The only area that saw a meaningful downturn was auto loan originations, which fell 20%, but that could be a good thing with car prices surging and some consumers struggling to pay for them.
Barclays PLC
Unlike Ally, U.K.-based Barclays PLC (BCS 1.52%) isn't one of Berkshire's current holdings, but it wouldn't surprise me if it was on Buffett's radar. The bank ran afoul of regulators earlier this year when it sold more debt securities than it had registered with the Securities and Exchange Commission, and that has weighed on the stock price. Plus it is a European bank, meaning that it has to contend with a more-challenging macroeconomic picture in a region with rising inflation and soaring energy costs. But at this point, its valuation is too cheap to ignore. Barclay's is even cheaper than Ally on a price-to-book value basis, trading at a price-to-book ratio of 0.4, meaning that Barclay's takes the "buying a $100 bill for $80" mantra even further and is more like buying a $100 bill for $40.
Barclay's also pays out a very attractive dividend. At the current stock price, shares yield nearly 5.5%, which is way above the average yield for the S&P 500.
Barclay's, with a market cap of about $30 billion, is a large, diversified bank with worldwide operations. It offers consumer banking, credit cards, investment banking, wealth management, and other financial services. It is one of the U.K.'s "high street banks" and boasts a leading position in personal banking and credit cards. At some point, the clouds from Barclay's one-time issue with regulators will clear, and patient long-term investors should be rewarded for buying the stock at a steeply discounted price while enjoying a nice dividend in the meantime.
These are three leading banks all trading at substantial discounts to book value, which gives investors a strong margin of safety and positions them well for solid returns over the long term.
