Book value is one of many ways investors can value a company and a comparison with the stock price can give an indication about whether a company qualifies as a value stock. Even after a strong run by stocks last year, some major companies still trade below book value and I'll take a look at four of them here.
Investor concerns continue to surround Bank of America (NYSE:BAC) as the bank pays out multi-billion lawsuit settlements on a quarterly basis. But the bank has made a lot of strides in its turnaround. Each lawsuit settlement is one B of A doesn't have to worry about in the future, earnings are back on track, and the bank passed the Federal Reserve's stress tests yet again.
With book value around $21 and shares trading under $17, B of A trades around 80% of its book value. In its latest capital return plan, B of A calls for repurchasing some of its shares at these below book value levels in the form of a $4 billion stock buyback. With shares at their current levels, this buyback should help boost book value per share provided the bank does not issue too many additional shares as executive compensation.
The biggest loser among the big banks from the stress tests was Citigroup (NYSE:C) which saw its capital return plan rejected. Originally targeting a $6.4 billion stock buyback and raising its quarterly dividend to five cents per share, the Fed shot down this plan only allowing the bank to continue its $1.2 billion buyback program and pay its measly one cent quarterly dividend.
Shares were off over five percent on the news establishing Citigroup as a value play rather than a dividend one. At around 70% of book value, Citigroup is cheaper on a book value basis than almost any other U.S. based bank. Further enhancing the value aspect is Citigroup trading around 80% of tangible book value, a figure that excludes many numbers that are easier to manipulate.
Citigroup still carries above average risk due to its exposure to emerging markets however, having a presence in these markets should give the bank an edge in long term growth. This is definitely not a dividend pick but it remains an excellent value in an industry that saw major rallies last year.
The big insurance blow up
American International Group (NYSE:AIG) is practically the face of corporate bailouts from the financial crisis. But since then, AIG has been selling off non-core assets and setting itself back up as a solvent major insurance company.
Despite all this, AIG still trades at around 70% of book value, a major discount compared to industry peers. Over the next few years, AIG shares could move closer to book value as profits rise due to higher interest rates and the AIG dividend moves closer to the levels offered by rivals.
Value in financials
With so many investors afraid that the current market is overvalued, it's worth taking a look at large cap companies trading at less than book value. While book value should not be used as a sole determinant for investing, in can help gauge valuations compared to peers.
For investors not looking for big dividends but still in search of value in this market, these three companies are a good place to start.
Alexander MacLennan is owns the following options: long AIG warrants, long January 2015 $20 calls on Bank of America, long Bank of America Class B warrants, long January 2015 $40 calls on Citigroup, long January 2015 $45 calls on Citigroup, long January 2015 $50 calls on Citigroup.