The financial services industry is a rather mixed bag. On the one hand there are a relatively large number of high quality companies with bright futures trading at very appealing prices. Investing in such stocks could equate to excellent long term gains. However, there are other companies which offer volatile, disappointing forecasts and yet demand a premium over a number of their peers. The difficulty, of course, is deciding into which camp a particular company falls into.
In the case of Santander (LSE: BNC), it appears to be worth buying at the present time. This, however, does not mean that it is a low-risk buy, since it faces a major challenge in Brazil which, until recently, was its dominant market. Of course, the problems Santander is experiencing in Brazil are mostly external, with the Brazilian economy enduring a very difficult period and this has caused Santander’s earnings forecasts to be downgraded significantly in recent months.
While double-digit growth was predicted for the current year and for next year, Santander is now forecast to grow its earnings by just 3% and 5% respectively. That’s below the wider market’s growth rate and is a key reason why the bank trades on a price to earnings (P/E) ratio of just 10.5. However, with other markets (notably the UK) performing well at the present time and Brazil likely to mount a comeback over the medium to long term, Santander appears to be a sound bank with a bright future, trading at a distressed price.
Meanwhile, spread betting company IG (LSE: IGG) also seems to be worth buying. It benefits from increased market volatility, so the August correction and subsequent yo-yoing of the UK index has been positive news and is likely to contribute to growth in the company’s bottom line of 2% in the current year, and a further 10% next year. This puts IG on a price to earnings growth (PEG) ratio of 1.7 which, while hardly dirt cheap, indicates that capital growth potential is on offer.
IG also has considerable income appeal. It currently yields 3.9% from a dividend which represents a rather lowly 70% of earnings. For a company with rather modest capital expenditure requirements, a higher payout ratio could lie ahead which, alongside the aforementioned earnings growth prospects, could equate to a very positive income return for the company’s shareholders.
Not all financial services companies offer such good value, though. Insurance business Hiscox (LSE: HSX), for example, trades on a P/E ratio of 15.5 and yet is expected to post a fall in its bottom line of 5% this year and a further decline of 9% next year. Certainly, the insurance industry is relatively volatile and Hiscox is a financially sound company with a strong reputation, but such a valuation indicates that capital growth may be lacking over the medium term.
Furthermore, Hiscox also yields just 2.4%, which is less than half the yield on offer at a number of its insurance rivals. Of course, a key reason for this is the 21% gains made year-to-date in the company’s share price, which have suppressed Hiscox’s yield and bloated its valuation. As such, now could be a prudent time to switch Hiscox for another insurer or financial services company on valuation grounds.