As you’ve undoubtedly heard, this has not been a good year for the markets so far with the S&P hitting correction levels. But rather than panic, I’m treating this downturn as an opportunity to pick up some bargain stock investments. And one of the stocks currently at the top of my buy list is UBS Group AG (UBS), which presents a strong dividend income opportunity.
UBS Group is a large financial services holding company headquartered in Switzerland. The company operates globally across five business segments: Wealth Management, Wealth Management Americas, Retail & Corporate, Global Asset Management and the Investment Bank. Read on for a breakdown of why UBS is on my buy list:
- High Dividend Yield
As of this morning, UBS had a dividend yield around 5.6%. The dividend yield is the annual value of the dividends (cash payments to investors) divided by the current price of the stock. In other words, it’s your annual return on investment if the stock price doesn’t move. UBS’ dividend yield is more than double the overall dividend yield of the S&P500 (around 2.75%). And as you know, I’m heavily focused on dividend stocks during this market downturn (more on dividends here).
The stock is down nearly 23% year to date, which has driven the dividend yield up. Generally, you might be concerned that a declining stock price means a company will lower its dividend. However, in its Feb. 2 earnings release, UBS announced it was issuing an additional special dividend of about $0.25 a share to reflect its strong 2015 earnings.
- Strong Earnings Growth
Speaking of strong earnings, UBS had a great year in 2015. Total net profit increased 79% year over year – its best net profit results since 2010. Interestingly, the stock price was actually driven down after this earnings report was released in early February – yet another reason this stock presents a buy opportunity.
The drop was because most of the profit increase came from the trading group, while the Wealth Management and Investment Banking groups saw decreased profits year over year. The skewed profit sources don’t worry me too much as this is not an issue unique to UBS – investors across the world have slowed down their activity in light of today’s tough market conditions.
- A low P/E Ratio
What happens when you combine strong earnings with a price drop? The P/E ratio (price divided by earnings) goes down. That’s a good thing in this case. P/E is a rough measure of the “cheapness” of a stock – the rule of thumb is the lower the P/E, the better the value you’re getting on the company (keep in mind that P/E is just one of many measures of value – a company could also have a low P/E because the market thinks it’s worthless). UBS’ current P/E is about half of its industry’s average P/E.
- The Swiss Advantage
Given the inherent risk and leverage that comes with bank operations, safety and risk-aversion and pretty admirable qualities in a financial services company. Luckily for potential UBS investors, Switzerland (where UBS is headquartered) has enacted one of the toughest regulatory regimes for banks.
UBS has actually enacted a debt buyback program to improve its Swiss leverage ratio this year – which is currently better than the required Swiss minimums.
- The Risks
As with any investment, it’s important to weigh the potential risks before deciding to buy. Risks for UBS include:
- Continued pressure on bank profits due to increasing regulations and a volatile marketplace
- The weakened exchange rate vs. the dollar and the euro
- Even with the debt buyback, UBS has a high amount of debt (as many banks have)
- Some of 2015’s strong profit growth was due to tax breaks that likely won’t re-occur in 2016
Overall, none of these risks concern me enough to take it off my buy list, particularly since the majority represent universal, not UBS-specific, concerns.
The Bottom Line
UBS could be a strong addition to your portfolio that adds income without adding excessive risk. The company pays a high dividend, with strong earnings and financial metrics to back it up.
And as one more bonus, UBS is actively trying to close the gender wage gap in their investment bank.