The market awakened to a myriad of challenges to the worldwide economy Thursday and turned in one of its worst performances of the year. Moody's did not help matters after the bell by cutting ratings on 15 banks, which was expected late in the day and was a main driver of the selloff. Although I would love to be able to invest in banks given they are still down substantially from pre-crisis levels and have low valuations, it is hard to pull the trigger given all the uncertainty around their balance sheets, the still-challenged housing market, and expanding regulation.
But I have found other areas of the financial sector that offer bargains with very reasonable valuations and solid dividend yields, with much less uncertainty. One of these areas is in the vanilla insurance industry. Here are two stocks in the sector I like at current price levels.
Aflac (AFL) provides supplemental health and life insurance and has a huge presence in Japan, where it is the number-one provider of individual policies in the country.
Four reasons AFL makes good sense as a value play at $41 a share:
• The company has an "A"-rated balance sheet, pays a solid dividend of 3.1% and it has raised its dividend payouts at an average rate of 9% annually over the past five years.
• Despite growing earnings at an 18% annual clip over the past half-decade, right through the financial crisis, the stock is selling at the bottom of its five-year valuation range based on price/earnings, price/sales, price/cash flow and price/book ratios.
• The stock is cheap at just 6x forward earnings as the market discounts its growth prospects. AFL has a low five-year projected price/earnings/growth ratio of under 1 (.58).
• The company is very shareholder friendly. It consistently uses its robust cash flow to increase its dividends and buy back stock, and I look for that to continue in the future.
Allstate (ALL) is one of the largest and best-known providers of personal property and casualty insurance, life insurance, and retirement and investment products with most of its business in the U.S.
Four reasons ALL offers good value at $34 a share:
• Consensus earnings estimates for both 2012 and 2013 have gone up in the past two months, despite volatility in the market. The stock trades at 8x forward earnings
• Analysts do not have a good handle on Allstate's earnings power. The company has significantly beaten analysts' predictions for five straight quarters. The average beat over consensus earnings expectations over the last four quarters has averaged 37%.
• The stock is cheap at 87% of book value, has an "A"-rated balance sheet and provides a dividend yield of 2.5%
• The stock is starting to attract the attention of some analysts as both Argus Research and Barclays have upgraded the shares over the past few months. Credit Suisse has an Outperform rating on Allstate.