3 Financials for the First Half of 2013
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Kicking the can down the road on the fiscal cliff should keep things frothy before the next round of partisan baiting begins. The year has started brightly, with all sectors performing well as the New Year hangovers were blown away.
All in all, 2012 was a good year for the markets. The S&P managed to finish the year up 12%. Better still, the market enjoyed strong leadership from sectors traditionally associated with bullish economies, such as Financials (Select Sector SPDR was up 28% for 2012), Discretionary (Select Sector SPDR up 24%) and Technology (Select Sector SPDR up 15%). Health Care was the only strong performing defensive sector, finishing the year up 17%, helped by Obama's re-election in 2012.
2012 also marked the third year for the cyclical bull market. As the cyclical bull market matures into its fourth year, finding winners becomes harder as money flows into specific sectors, rather than a blanket recovery typical of early bull markets. For the first half of 2013 we should see current market leaders continue to perform strongly. Leading stocks will likely be drawn from the Financial and Discretionary sectors. However, by year end, we should see stronger relative gains in some of the underperformers of 2012, chiefly Energy and Utility stocks.
Ameriprise Financial successfully managed to erase all the losses from its 2011 high. It even went one better, and managed to take out its pre-credit crunch high, too. It managed this while retaining a respectable dividend yield of 2.8%, ensuring any substantial loss in price from here will probably attract the interest of income investors. Indeed, the company has increased the dividend by $0.10, appealing directly to this investor group. The announced $2 billion share buyback program is substantial when factored against the $13 billion market cap. This will further bump the yield and improve earnings metrics. The financial planner's next earnings release is due at the end of January, and analysts are anticipating a big quarter, despite the company falling short in Q3.
The company launched a new brokerage platform to handle its 2.5 million client accounts and 10,000 advisors, and such transitions are frequently distracting (if not admitted) when it comes to the primary business. The loss of the Zurich account contributed to $1.1 billion of the $3.5 billion net outflow for Q3, although this amounted to less than 1% of total assets under management. Also contributing to the loss was a $1.6 billion outflow related to the "termination of the hedge fund portfolio manager," which can never be good! Although, the retail and hedge fund outlook was mixed. So short-term earnings growth will likely have to come from cost efficiencies and probably nickle-and-diming their clients more; not good for loyalty and it could undermine their success so far in growing their client base. It will take the company a couple of quarters to sort out issues pertaining to some portfolio managers, which are dragging on the company. The issues experienced by Ameriprise are not unique to the sector, and buyers are exhibiting confidence the company will work its way out of them.
The credit card stalwart American Express has also seen its stock recover back to the highs of 2007. The company has consistently come in ahead of analyst estimates, with only Q3 coming in at estimates. However, as the company admitted, recent growth in earnings is more smoke-and-mirrors, and was the result of better per share metrics as generated by the share buyback program. Earnings are scheduled for the middle of January. Can they surprise?
The company reported a 4% growth in cardmember spending, with a 6% growth in card borrowings. This trend is somewhat worrying, as consumer spending had effectively been flat for Q3, suggesting more individuals are relying on their credit cards for essentials. However, the demographics for American Express skew much older, than say, Bank of America. So by serving older, wealthier individuals with greater discretionary funds, American Express is able to limit exposure to weaker consumers other credit card providers cater to. American Express has geared itself towards exclusivity, which provides some protection from the vagaries of broader consumer concerns. Adding to this, American Express' debt write-off rate remained relatively static at around 2%, which are historic lows and one of the best for the industry.
American Express has also one of the highest rates of paydown in the industry. This grew through the financial crisis as people covered their debt, thereby limiting interest-based earnings. But the last four quarters have seen paydown rates stabilize, which has resulted in an increase in its loan book (and earnings generated from interest payments). The end of the fiscal cliff saga should boost consumer spending as people know what to expect in their paychecks for 2013. Although, ironically, the increased taxes on upper income earners will hurt American Express more than other providers. However, the net effect should see a boost in consumer spending with the uncertainty removed, which should become apparent in Q1 earnings.
The next stock to make the cut was Invesco. Invesco is an asset management firm, probably best known for its PowerShares ETF products. The firm enjoyed similar price growth as the aforementioned stocks, but hasn't yet managed to burst above its 2007 high. The most recent conference call had a low key open, with Hurricane Sandy impacting on business, along with economic weakness in China and Europe, and the fiscal cliff. Caution was very much a theme.
However, the company did enjoy one of the strongest net inflow of funds in the history of the company, with $11.7 billion added in the last quarter, bringing total assets managed to $683 billion. So despite the cautionary open, Invesco was able to deliver very strong growth. The strong growth was seen in both Institutional and Retail sectors, helped by a low redemption rate of 20% compared to and industry wide 28%. One sector to perform particularly well was its Fixed Income division, particularly in Europe, as investors remained risk averse, but CEO Martin Flanagan was keen to add that while results were really good, "the world is just starting to move to really where our strengths are." This bodes well for the future.
On a final note, for what looks to be a concerted effort by Financials to improve their attractiveness to income investors, 2012 saw a sharp growth in Invesco's dividend payment; up to 17.25 cents per share from 12.25 cents. The current yield sits at 2.6%, which decent enough, would probably require a drop in the share price to make the stock truly attractive to income investors.
All three stocks are at, or close to, all-time highs. While all three stocks have seen big gains off their 2009 lows, it hasn't been until 2012 that the wind has been behind these stocks. With fresh air above, who knows how far these stocks can fly? Financials are looking good for the first half of 2013.
fallond has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Express Company. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!