Jefferies Financial Group (NYSE:JEF) is recognized as a leading independent investment bank with a diversified business that includes capital markets and asset management. 2021 was a record year for the company which was able to leverage its climbing market share in various segments into strong earnings. On the other hand, the stock has been under pressure over the last several months with a sense that the operating environment is slowing amid volatile financial market conditions and the more recent macro uncertainties. That said, we believe JEF looks interesting on the selloff with the current level setting up a new buying opportunity. The company hiked its quarterly dividend which now offers one of the highest yields among a peer group of U.S. investment banks in the industry among U.S. banks at 3.6% supported by overall solid fundamentals and a positive long-term outlook.
Jefferies – Financials Recap
Jefferies reported its Q4 earnings back on January 12th with non-GAAP EPS of $1.36 which beat expectations by $0.11, while the GAAP result at $1.20 was slightly below estimates. Revenue of $1.8 billion declined by 2.7% year over year although the context considers that the comparison period in Q4 2020 was exceptionally strong during the early stages of the pandemic recovery. The full-year 2021 revenue at $8.2 billion, climbing 36% y/y along with EPS of $6.13, up 131% from $2.65 in 2020, is more reflective of the underlying momentum.
While Investment Banking and Capital Markets segment managed to maintain positive year-over-year growth in Q4, the smaller Asset Management group revenue decline was based on weaker market returns over the period. Merchant banking was also down in Q4, again considering the difficult comps in the year prior.
Jefferies has increased headcount and overall higher compensation has added to expenses as a broader financial industry theme in a tight labor market. The core financial metric in an annualized return on adjusted tangible equity at 16.5% pulled back from 17.5% in the period last year.
Jefferies Dividend Hike and Buybacks
Jefferies has hiked its quarterly dividend in each of the past 6 years including the latest increase to $0.30 per share which yields 3.6% on a forward basis. The last payment was in February and shareholders can expect the Q2 dividend in May. The company has also been active in stock buybacks, repurchasing about $269 million in common shares over the past year which has reduced the share count by about 3.5%. Furthermore, with the Q4 earnings release, the company increased its buyback authorization by $88 million back to a total of $250 million. Putting the two together, the capital allocation strategy implies a shareholder yield approaching 7% considering the dividend and buybacks. We view JEF as a high-quality dividend stock within the financials sector.
JEF Stock Price Forecast
The key takeaway from the trends in 2021 is the impressive growth over the last several years with the Jefferies business accelerating during the pandemic. Total revenues are up over 125% from 2019. The company notes a 17.5% average annual growth rate in net income since the year 2000 with the story being a climb up the “league tables” for various financial products and service segments.
Jefferies now ranks 6th globally or 5th in the U.S. for mergers and acquisitions in terms of deal value. The company is also within the top 5 for equity trading and equity research, while holding the number 1 spot in the U.S. LBO loans. In other words, Jefferies has cemented itself among the “bulge bracket” names as a major player in finance. The point here is that Jefferies is well-positioned to continue growing and consolidating its market share as a part of a long-term bullish thesis for the stock.
There are a couple of near-term headwinds that are hard to overlook in the current market situation defined by extreme market volatility with the ongoing Russia-Ukraine conflict. Simply put, it’s not a great environment for M&A which is the group’s core operating business. The combination of difficult comps with a record 2021 along with the trends in rising interest rates represents a more challenging rest of 2022.
This dynamic is reflected in the current consensus estimates. The market is forecasting revenue of $6.4 billion in the fiscal year 2022 to decline by 22% y/y while EPS pulls back a larger 38%. For 2023, the outlook is for a rebound to the top-line and earnings momentum but it’s clear there is a lot of uncertainty in these estimates beyond 2022.
From traders’ perspective, there is a case to be made that the selloff in the stock has already priced in some of those weaknesses. Shares of JEF are down 26% from its Q4 2021 high and we note that shares currently around $33.00 are back to a level that appears to represent some important technical support that goes back to levels from Q1 of last year. We believe the stock should be able to consolidate around this level
Considering a forward yield on the stock at around 3.6% (2.9% on a trailing twelve months basis), we note that JEF’s dividend is one of the largest among comparable investment banks considering JPMorgan Chase & Co. (JPM) and Morgan Stanley’s (MS) dividend yield about at 2.75%. To be clear, there are other financial institutions with a larger dividend yield like Lazard Ltd (LAZ) and Moelis & Co. (MC) closer to 5%. Each bank here has their unique company-specific dynamics and typically focus on different financial products and services.
The attraction in JEF’s payout is the company’s larger scale that has moved beyond a “boutique” profile including global operations. We argue that JEF stands out by its diversification within investment banking and capital markets business which offers a higher long-term growth potential compared to the broader industry.
There’s a lot to like about JEF as a high-quality segment leader which has put together an impressive trend of operating and financial momentum. We rate shares as a buy with a price target of $40 eyeing value on the recent weakness. At our price target, JEF would be trading at a forward dividend yield closer to 3% which is more in line with sector peers. JEF seems to be a value pick in the financial sector in our opinion on this selloff.
Getting past the Russia-Ukraine conflict, improving sentiment in risk-assets could be enough to jump-start momentum and send shares higher. For income investors, the JEF’s dividend yield makes it a good choice among investment banking stocks and a strategy of slowly starting to accumulate shares can make sense.
The key risks to watch include a further deterioration of the economic conditions. Persistently high inflation coupled with slowing economic growth represents a poor backdrop for investment banking activities. Weaker than expected results over the next few quarters can also send shares lower.