For investors seeking a balanced investment in terms of a top notch yield, earnings growth potential and great value, the financial services sector is a stunning place to look.
Certainly, the operations of banks and other financial companies may be somewhat more difficult to understand compared to, for example, a house builder or utility company. However, in the long term, the financial services sector could be one of the most profitable places to invest and, as such, buying shares in the likes of Barclays (LSE: BARC), Investec (LSE: INVP) and Close Brothers (LSE: CBG) appears to be a shrewd move.
For example, wealth manager and private banking business, Investec, is expected to significantly improve upon the mid-single digit earnings growth of the last two years by posting a rise in net profit of 11% in the current year. It is then forecast to follow this up with a rise of 15% next year, which means that its earnings could be as much as 28% higher next year than they were last year.
Despite this, Investec trades on a price to earnings (P/E) ratio of just 12.2 which, when combined with its upbeat growth prospects, equates to a price to earnings growth (PEG) ratio of only 0.7. This indicates that its shares offer growth at a very reasonable price, while a dividend yield of 4.3% also holds considerable appeal. And, with dividends being covered 1.9 times by profit, there is plenty of scope for dividend rises over the medium to long term, too.
Similarly, asset management company, Close Brothers, is also due to post double-digit rises in its bottom line over the next two years. This would come after four years of exceptionally consistent growth, with Close Brothers having recorded a rise in its net profit in each of those years, with it increasing at an annualised rate of almost 16% per annum during the period.
Despite such resilient and impressive profitability, Close Brothers trades on a P/E ratio of just 12.8. That’s despite its shares having more than doubled in value during the last five years. Furthermore, with a dividend yield of 3.6%, Close Brothers has great appeal as an income play – especially with dividends being covered 2.1 times by profit. This indicates that they are highly sustainable and due for a significant rise in the coming years.
Unlike Investec and Close Brothers, Barclays has a rather disappointing yield at the present time. In fact, it yields just 2.7% but, looking ahead, this is all set to change. That’s because Barclays pays out just 29% of profit as a dividend which, during the credit crunch, was perhaps understandable. However, with the UK and global economies improving, Barclays may find that there is little need to retain such a large proportion of capital, thereby increasing the level of shareholder payouts over the coming years.
In addition, Barclays is expected to record a rise in earnings of 34% this year, followed by an increase of 22% next year. This should positively catalyse investor sentiment in the bank and push its rather lowly P/E ratio of 11 significantly higher over the medium to long term.
Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.