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 banner year for the company which was able to leverage its growing market share in various segments to generate strong profits. On the other hand, the stock has been under pressure over the past few months, with the feeling that the operating environment is slowing down amid financial market volatility and more recent macroeconomic uncertainties. That said, we think JEF looks interesting on the short side with the current level creating a new buying opportunity. The company raised its quarterly dividend, which now offers one of the highest yields among a peer group of U.S. investment bankers in the industry among U.S. banks at 3.6%, supported by overall strong fundamentals and positive long-term outlook.
Jefferies – Financial summary
Jefferies reported fourth-quarter earnings on Jan. 12 with non-GAAP EPS of $1.36 beating expectations by $0.11, while GAAP earnings at $1.20 were slightly below estimates. Revenue of $1.8 billion was down 2.7% year-over-year, although context considers the comparable period to the fourth quarter of 2020 was exceptionally strong at the start of the pandemic recovery. Full-year 2021 revenue of $8.2 billion, up 36% YoY with EPS of $6.13, up 131% from $2.65 in 2020, more reflect the underlying dynamics.
While the Investment Banking and Capital Markets segment managed to maintain positive year-over-year growth in the fourth quarter, the lower revenue decline in the Asset Management group was based on market returns lower over the period. Investment banking was also down in the fourth quarter, again given tough competitors from the prior year.
Jefferies increased its workforce and higher overall compensation added to expenses as a broader financial industry theme in a tight labor market. The core financial measure in an annualized return on adjusted tangible equity at 16.5% was down from 17.5% in the year-ago period.
Dividend hike and buyouts from Jefferies
Jefferies has increased its quarterly dividend in each of the past 6 years, including the last increase to $0.30 per share, which yields 3.6% on a forward-looking basis. The last payment took place in February and shareholders can expect the second quarter dividend in May. The company has also been active in share buybacks, repurchasing approximately $269 million of common stock over the past year, which has reduced the number of shares by approximately 3.5%. Additionally, with the release of fourth quarter results, the company increased its repurchase authorization by $88 million to a total of $250 million. By combining the two, the capital allocation strategy implies a shareholder return close to 7% taking into account the dividend and redemptions. We consider JEF to be a high-quality dividend-paying stock in the financial sector.
JEF stock price prediction
The key takeaway from the trends in 2021 is the impressive growth over the past few years as Jefferies’ business ramps up during the pandemic. Total revenues increased by more than 125% compared to 2019. The company notes an average annual growth rate of 17.5% in net profit since the year 2000, with the story being an ascent in the “league tables for various financial services products and segments.
Jefferies now ranks 6th in the world or 5th in the United States for mergers and acquisitions by deal value. The company is also in the top 5 for trading and equity research, while occupying the top spot in US LBO loans. In other words, Jefferies has established itself among the names of the “bulge bracket” as a major player in finance. The point here is that Jefferies is well positioned to continue to grow and consolidate market share as part of a long-term bullish thesis for the stock.
There are some near-term headwinds that are hard to ignore in the current market situation defined by extreme market volatility with the ongoing conflict between Russia and Ukraine. Simply put, it’s not an ideal environment for mergers and acquisitions, which is the group’s core operational business. The combination of tough competition with a record 2021 year and rising interest rate trends make for a tougher remainder of 2022.
This dynamic is reflected in current consensus estimates. The market expects revenue of $6.4 billion in fiscal 2022 to decline 22% year-over-year, while EPS will decline 38%. For 2023, the outlook is for a rebound in revenue and earnings momentum, but clearly there is a lot of uncertainty in these estimates beyond 2022.
From a traders’ perspective, there is reason to believe that the stock’s sell-off has already taken some of these weaknesses into account. Shares of JEF are down 26% from their Q4 2021 high and we note that the shares currently around $33.00 have returned to a level that appears to represent significant technical support back to the levels of the first quarter of last year. We think the stock should be able to consolidate around this level
Given a forward yield on the stock of approximately 3.6% (2.9% year over year), we note that JEF’s dividend is one of the largest among peer investment banks. taking into account JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) dividend yield of approximately 2.75%. To be clear, there are other financial institutions with a higher dividend yield like Lazard Ltd (LAZ) and Moelis & Co. (MC) closer to 5%. Each bank here has its own business-specific dynamics and generally focuses on different financial products and services.
JEF’s payment appeal is the larger scale of the business that has moved beyond a ’boutique’ profile including global operations. We argue that JEF stands out for its diversification within investment banking and capital markets activities which offers higher long-term growth potential compared to the industry as a whole.
There’s a lot to love about JEF as a high-quality segment leader that has established an impressive trend of operational and financial momentum. We rate the stock as a buy with a price target of $40 given the recent weakness. At our price target, JEF would trade at a forward dividend yield closer to 3%, which is more in line with industry peers. JEF appears to be a value pick in the financial sector in our view on this sell-off.
Beyond the Russian-Ukrainian conflict, improved confidence in risky assets could be enough to rekindle momentum and lift stocks 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 stocks may make sense.
Among the main risks to watch is a further deterioration in economic conditions. The persistence of high inflation combined with a slowdown in economic growth constitutes an unfavorable context for investment banking activities. Weaker-than-expected results in the coming quarters can also push stocks down.