Financial Stocks – Five Favorites For 2023

• 23. February 2023

(Last Updated On: 25. February 2023)

In my article about my favorites among industrials stocks, I showed you five candidates for 2023 to check. When it comes to financial stocks, most people usually think of companies like Bank of America, insurance companies like AIG, or asset manager BlackRock. But within this industry, there are a lot of more pearls to be discovered, and I would like to present my favorites for the year 2023.

Disclaimer: I am NOT a financial advisor. I’m using information sources believed to be reliable, but their accuracy cannot be guaranteed. The information I publish is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. You are advised to discuss your investment options with your financial advisers, whether any investment is suitable for your specific needs. I may, from time to time, have positions in the securities covered in the articles on this.

Old Republic International (ORI)

Some of you might already know this one among financial stocks. Old Republic International is an insurance company from Chicago that was founded in 1923. This company is getting managed on principles that could be invented by Warren Buffett. In other words, conservative insurance business at its best and stern risk management. Old Republic counts big institutions and companies as customers to which it offers insurance packages for employees. And its second business segment is the so-called title insurance. A title insurance shall protect from false or defect entries in the land register or the unenforceability of mortgage loans.

• Old Republic International is a so-called dividend champion that has been raising the dividend for the last 40 years in a row. The last dividend raise was, for instance, in September 2022.
• When you check the dividend yield, you will see that it’s just around 3.47%. But appearances are deceptive because the actual dividend yield lies around 8%! How is it possible? The answer is simple: Old Republic is regularly paying an extra dividend, and that’s what makes this company special. The extra dividend is usually between $1 and $1.50 per share.
• The stock of ORI currently has a P/E of around 11.5%. The average P/E of it lies currently around 15.57. Hence, historically, the stock of Old Republic International is fairly valued.
• The price-to-book ratio is around 1.42 which lies above the preferred value of 1 or lower. But for this stock, it’s still a good one when we consider the other facts.

Bank OZK (OZK)

This one is a regional bank based in Little Rock, Arkansas. Thus why this one could be out of the scope of world finance. And that’s why a lot of investors might oversee this company, too. Bank OZK owns around 250 subsidiaries and operates a classic business for private and business clients in these states: Arkansas, Georgie, Florida, North and South Caroline, Mississippi, New York, California, and Texas. In the second half of the year 2018, there was a drop in the stock price because of a longstanding overvaluation. At that time, OZK suffered from two large unpaid real-estate loans that showed that even the best banks make mistakes from time to time. But the overvaluation disappeared soon and meanwhile, there seems to be proof that the business policy of this bank is still conservative, despite the mistakes.

• The dividend yield is currently at around 2.9%
• With a P/E ratio of around 10.22%, it’s well below the five-year average of currently 10.56%.
• But OZK is also increasing the dividend regularly. Meanwhile, it was 26 years in a row. And this means, over the financial crisis of 2007/2009 and the COVID-19 crisis, too.
• The dividend growth rate is remarkable. It lies around 17.8% annually on average over the past 15 years. With this, it means that for the last 50 quarters, the dividend increased by 1 Cent each quarter per share.
• Another positive aspect is the low payout ratio of around 28%. This leaves a lot of safety buffers which should allow for an increase of the dividends even during hard times.

State Street Corporation (STT)

Number three in our financial stocks list is another bank. State Street Corp has its headquarters in Boston, Massachusetts. But it’s a complete different bank than Bank OZK. The difference is that it’s a deposit bank. In other words, a bank for institutional investors. It counts insurers, foundations, large companies, and other institutional investors to its customers, holding their accounts at State Street and letting the bank manage them.

Thus, this bank is actually running the back office related to account management, compliance guidelines, and many other things. The second business pillar of this company is the ETFs. For instance, the whole SPDR family comes from State Street, and here, all sorts of ETFs are issued and managed, including passive and active funds.

• State Street has increased the dividend for the last 12 years in a row
• It resumes its share repurchase program. In Q4 2022, there were around 1.5 billion repurchased stocks. Through the end of 2023, another 4.5 billion stocks planned to repurchase
• Doing this, the company plans to return up to 200% of earnings in the form of dividends and stock repurchases (dependent on market conditions)
• A total dividend payout of around 32% ensures that State Street keeps maintaining a financial buffer for future payments during hard times

Capital Southwest Corporation (CSWC)

One of the most challenging industries for investments are so-called business development companies. On the one hand, they are popular with investors because they pay high dividends. On the other hand, there are a lot of black sheep in this industry, where the management tries to line their pockets, causing conflicts of interest with shareholders.

Among financial stocks, Capital Southwest Corporation is relatively unknown to the broad public. It has its headquarters in Dallas, Texas, with just 23 – 24 employees. But it was founded already in the year 1961, and in 2015, the company re-profiled itself.

• CSWC has increased the dividend for 7 years in a row. The price dropped 26% from its 12-months-high and could discourage some investors. But actually, this makes engagement in this company even more attractive. Sure, investing in such a company can be risky because business development companies earn money by investing growth capital in other companies. They do this by providing growth capital for companies already achieving positive results. But credit allocation in times of possible recession increases the risk of bad loans in case a company goes bankrupt. But of course, because of its long history, CSWS has experience in dealing with such situations and uses its own rating system.
• The company also increased the regular dividend in December 2022, and as soon as an active investment successfully concludes, investors get a special dividend.
• Another aspect speaking in favor of Capital Southwest is that the employees holding around 15% of the company’s shares. And of course, they will ensure keeping the business going successfully.

CME Group (CME)

The CME group is maybe the largest exchange operator worldwide. The company is running several exchanges alone in Chicago. Among them are the largest futures and options exchanges, namely the CME, CBOT, NYMEX, and COMEX. In 2012, the CME Group changed its dividend policy. Since then, the company is paying the regular dividend and increasing it regularly. But at the end of every financial year, investors get a fifth dividend which depends on the annual business performance.

• If you take a look at the dividend yield of around 2.33%, it doesn’t look appealing. But it’s just the regular dividend. When you add the fifth dividend, the situation looks much more inviting because in this case, the dividend yield lies at levels of 4 – 5%, depending on the company’s performance of the respective year. This all is eventually accompanied by an average dividend growth of 17.8% over the last 15 years.
• The CME is extraordinarily innovative when it comes to new products. For instance, besides the usual futures contracts, CME also developed mini-futures, micro futures, and for a couple of years, there are also mini-options and micro options available on these products.
• In other words, the CME Group is permanently able to extend the number of transactions and that’s for sure the reason for recent record numbers in daily volume. Exchanges usually earn best when the prices are dropping because in this case, people are starting to trade madly. And as we know, an exchange is a marketplace that lives from the turnover and not from increasing or falling prices alone.

Financial Stocks – Final Words

The financial sector and financial stocks are quite attractive to investors. But it is important to knowing to deal with these companies and to do the homework. In case of success, an investor would be independent on the usual companies known by everyone like City Bank or Bank of America. Instead, you would find some pearls or hidden champions within this industry paying a decent dividend.

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