Looking for stocks that generate high dividend yields in dollars and that you can trust in the long run. To do this, you will need to evaluate all applicants according to the following minimum set of criteria:
- Revenue and profit of the issuing company;
- The position of the company with cash and liquidity;
- Dividend payout ratio;
- History of dividend payments;
- Prospects for the further development of the company.
However, I have already found one such company for you. Principal Financial Group (NASDAQ: PFG) is a company whose shares meet all of the above criteria. Let me tell you about it in more detail.
Stunning first quarter
Principal Financial is a financial services company with three main lines of business:
- Insurance (insurance);
- Investment management;
- Administration of pension plans (retirement-plan administration).
In the first quarter of 2021, the company posted excellent results with net income of $ 517 million, nearly double the $ 289 million generated in the first quarter of 2020. This growth was driven by the company’s two largest business segments:
- Retirement and income solutions – the provision of services for the maintenance of accounting and administration of company pension plans, as well as annuities for individual investors, led to a rise in profits by 41% to $ 288 million;
- Principal global investors – management of mutual funds, exchange-traded funds (ETFs) and institutional assets, brought in profit of $ 141 million, which is 25% more than last year. The company ended the quarter with $ 8.2 billion in net fund inflows and a record $ 820 billion in assets under management.
Subdivision Principal International, which provides a wide range of financial services to international clients, has more than doubled its profit – from $ 31 million to $ 75 million. The only line of business that saw a decline was insurance. Here, profits fell 25% to $ 95 million.
For the whole financial year (ended March 31), Principal Financial’s profit increased 29% to $ 1.6 billion. Over the past 10 years, the company’s revenues have grown at about 10% per year, while revenues have increased by about 5% per year.
High and steadily growing dividends
The stable profit has allowed the company to increase its dividend annually over the past eight years. In the second quarter, the company increased its quarterly dividend by 9% to $ 0.61 per share, which translates into an annualized return of about 4% (more than double the average dividend yield of S&P 500 companies).
A good indicator of the stability of this high yield is the Payout ratio, which shows the ratio of dividends paid to profits earned by the company (in other words, the percentage of annual profit that goes towards dividend payments). Principal Financial has a payout ratio of around 39%, which is a good, steady percentage. A too high value of this ratio (say, more than 60%) would indicate that the company is paying too much dividends, possibly to the detriment of other areas of its business.
By the end of the first quarter, Principal Financial had about $ 2.8 billion in excess capital, and that figure was growing steadily. This type of liquidity helps the company maintain its growing dividends.
Principal Financial shares are up 25% this year, but they still trade at great multiples:
These numbers (when compared to those in the industry) suggest that Principal Financial is currently undervalued.
In addition, there are many other reasons why the shares of this company can be very attractive to long-term investors. For example, the company acquired Wells Fargo’s institutional retirement and trust business last year and is currently integrating it into its retirement solutions segment. With the acquisition of Wells Fargo, Principal will become one of the top three retirement plan account operators in the United States.
Principal Financial is also expanding its business in the field of investment management – investment management. Recently, three new multifactor ETFs were launched, targeting companies, within the index, corresponding to various factors (such as: cost, quality and volatility). This business has a fairly high investment performance – 89% of its products are rated above average.
In February 2021, Principal signed a settlement agreement with Elliott Investment Management to add two new directors to the board. There are speculations that Elliott will insist that the company focus on its more profitable lines of business and possibly discontinue its life insurance business. So far, the market has reacted favorably to the agreement with Elliott.
So, in addition to high dividends, there is now a lot in Principal Financial stocks that might appeal to potential investors. And I consider them to be a good investment in the long term.
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