Investors may latch onto the comeback

Donald Saltz

August 07, 1992|By Donald Saltz

When shorter-term interest rates are especially low, as they are now, investors become more interested in the stock market. Their objective is usually to obtain dividend yields that exceed interest rates being paid on certificates of deposits or other types of fixed-rate savings.

What investors might also consider is buying shares of companies that have been hit hard by economic conditions but which are on the way back -- companies whose losses have been halted, expenses have been reduced and earnings, if not here yet, are on the horizon.

Buying such stocks when interest rates are relatively high is costly because of the income that is lost, but one gives up much less yield to take a chance on such stocks now. Also, the companies whose shares are being bought should benefit from the lower interest rates.

Price-earnings ratios, by the way, mean virtually nothing when they're attached to recovering stocks. The P-E's will likely come down sharply as the quarters pass and earnings improve.

One stock that is on the way back -- its share price reflects the company's improved prospects but it's still very depressed -- is that of the USF&G Corp., a large property and casualty insurer with headquarters at 100 Light St. in Baltimore.

USF&G is trading near 14 now, after dipping to a fraction above 5 just last year during its earlier stages of cost-cutting and change in structure. The current share price, while relatively strong, is less than half the price in 1990 before losses set in and the share price fell to 7.

The company has come through a rainstorm of heavy losses in the past two years -- about $800 million -- but has returned to profitability in its basic insurance operations, which are now entirely property and casualty. A company official notes that USF&G has racked up four straight quarters of profits from its insurance business though net income per share disappears into a slight pool of red ink after the payment of preferred dividends.

Through all its problems with underwriting and other losses, USF&G sharply reduced its dividend several times but it was never eliminated, a sign that the company wanted to remain as an investment possibility for institutional investors who require dividend-paying stocks. It was also a hint that losses were not permanent.

Another kind of investment

Citizens Bancorp., which is based in Laurel, has a reputation of being one of the most conservative banking businesses anywhere. Along the pattern of the Mercantile Bankshares Corp. of Baltimore, Citizens is not a commercial real estate lender and it has mostly avoided loans to speculative builders, but not entirely. It did succumb to some of those borrowers and earnings were affected.

Last year, Citizens earned $1.44 a share, well covering its $1.08 per share annual dividend rate, but without the real estate problems affecting earnings, net income would have been about 25 percent higher.

Citizens' potential is from regular, though probably moderate, growth in earnings and dividends. Its strength also lies in its strong franchise in Maryland where it has most of its more than 130 offices, largely in Montgomery and Prince George's counties. The firm is considered a quality acquisition possibility by another banking firm, though not likely at a high premium.

Citizens' share price hangs between 20 and 21, or about $2 per share ahead of its book value.

These days, acquisitions are not made at huge premiums over book but Citizens could be expected to bring a price at least in the mid-20s and as time goes by probably a higher price.

Citizens current dividend yield of about 5.3 percent is better than most of the yields the bank offers on savings.

It seems to be a good stock to have for its potential while not abandoning income for now.

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