Diversify your Finance-sector holdings

Non-bank financial companies, such as mutual-fund and insurance firms, are good ways to diversify your Finance-sector holdings. The six we analyze below are leaders in their niche markets. That cuts their risk. As well, their well-known brands will help them grow as the global economy continues to recover. We have a high opinion of all six companies, but only two are buys right now.

AMERICAN EXPRESS CO. $41 (New York symbol AXP; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.2 billion; Market cap: $49.2 billion; Price-to-sales ratio: 1.9; Dividend yield: 1.8%; WSSF Rating: Average) gets most of its revenue from the the fees it charges merchants when consumers use its credit and charge cards. It also provides travel-agency services.

American Express set aside $5.3 billion to cover bad loans in 2009. That’s down 8.4% from $5.8 billion in 2008. However, the 2009 figure is still up more than 100% from four years ago.

In 2009, the company’s earnings fell 25.6%, to $2.1 billion from $2.9 billion in 2008. The company sold $555.5 million of new common shares in 2009 to help repay the $3.4 billion in loans it received from the U.S. Treasury under the Troubled Asset Relief Program (TARP). Because of the extra shares outstanding, earnings per share fell 37.7%, to $1.54 from $2.47. Revenue fell 13.5%, to $24.5 billion from $28.4 billion.

American Express’s earnings should rise to $2.68 a share in 2010. The stock trades at 15.3 times that estimate.

The company’s credit losses are slowing. It should also benefit from rising travel demand as the economy improves. However, the likelihood of higher interest rates could prompt cardholders to cut their spending.

American Express is a hold.

STATE STREET CORP. $45 (New York symbol STT; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 495.4 million; Market cap: $22.3 billion; Price-to-sales ratio: 2.7; Dividend yield: 0.1%; WSSF Rating: Extra Risk) makes most of its money providing accounting and record-keeping services to large institutional investors, such as mutual funds and pension plans.

State Street has agreed to pay $313 million to settle lawsuits that accused the company of selling investors securities backed by subprime mortgages without warning of the risks involved. This latest payment is in addition to $350 million that State Street has already paid to settle earlier lawsuits.

If you exclude these payments and other unusual items, State Street would have earned $2.0 billion in 2009. That’s down 14.9% from $2.4 billion in 2008. In May 2009, State Street issued $2 billion of common shares and used the proceeds to pay back its TARP loans. As a result of the extra shares, earnings per share fell 26.7%, to $4.11 from $5.61. Revenue fell 16.4%, to $8.8 billion from $10.5 billion.

State Street’s earnings should rise to $4.30 a share in 2010. The stock trades at a low 10.5 times that figure.

However, the company holds $12.1 billion of securities backed by mortgages, student loans and credit-card loans. If the economy weakens, State Street may have to write down the value of these holdings.

State Street is a hold.

T. ROWE PRICE GROUP INC. $55 (Nasdaq symbol TROW; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 259.0 million; Market cap: $14.2 billion; Price-to-sales ratio: 7.7; Dividend yield: 2.0%; WSSF Rating: Average) sells mutual funds and wealth-management services.

The company’s assets under management rose 41.6%, to $391.3 billion at the end of 2009 from $276.3 billion a year earlier. Rising stock markets were the main reason for the increase. As well, the improving economy spurred higher demand for mutual funds.

Despite these gains, average assets under management still fell 10.3% in 2009. As a result, T. Rowe Price’s revenue fell 11.8% in 2009, to $1.9 billion from $2.1 billion in 2008. Earnings dropped 11.7%, to $433.6 million from $490.8 million. Earnings per share fell 8.8%, to $1.65 from $1.81, on fewer shares outstanding.

However, T. Rowe Price’s outlook continues to improve with the overall economy. It has also launched new products, such as actively managed exchange-traded funds, that should fuel its growth.

As well, T. Rowe Price recently paid $142.4 million for 26% of UTI Asset Management, India’s fourth-largest wealth-management firm. T. Rowe Price is also looking to expand in China. The U.S. accounts for 88% of its assets under management, so expanding internationally helps diversify its risk.

The company’s earnings should rise to $2.40 a share in 2010. The stock trades at 22.9 times that figure.

T. Rowe Price is a hold.

WESTERN UNION CO. $17 (New York symbol WU; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 682.8 million; Market cap: $11.6 billion; Price-to-sales ratio: 2.3; Dividend yield: 1.4%; WSSF Rating: Above Average) provides money-transfer and foreign-exchange services in over 200 countries.

The company recently completed a restructuring that included closing some outlets and outsourcing certain administrative functions. These moves should save it $40 million a year.

If you exclude unusual costs, Western Union earned $902.7 million in 2009. That’s down 7.0% from $970.6 million in 2008. The company spent $400 million on share buybacks during the year. Since it had fewer shares outstanding, its earnings per share fell just 1.5%, to $1.29 from $1.31.

The company’s 2009 revenue fell 3.8%, to $5.1 billion from $5.3 billion. Without the negative impact of foreign-exchange rates, however, revenue would have fallen by just 1%.

Western Union’s long-term outlook remains bright. That’s because demand for money transfers will rise as the global economy strengthens. As well, the company plans to buy back $1 billion of its shares over the next three years. The stock trades at 12.9 times the $1.32 a share that Western Union will probably earn in 2010.

Western Union is a buy.

H&R BLOCK INC. $17 (New York symbol HRB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 329.2 million; Market cap: $5.6 billion; Price-to-sales ratio: 1.4; Dividend yield: 3.5%; WSSF Rating: Above Average) is the world’s largest provider of income-tax-preparation services. It also provides accounting services to businesses, as well as banking services to consumers.

The slow economy and high unemployment are prompting more tax filers to turn to tax-preparation software or free online-processing services. That’s cutting into revenue at H&R Block’s traditional tax-preparation business. As well, the weak economy is hurting demand for its accounting services from businesses.

As a result, H&R Block’s revenue fell 5.9%, to $934.9 million, in the three months ended January 31, 2010. Its revenue was $993.4 million a year earlier. Earnings fell 19.8%, to $53.6 million, or $0.16 a share, from $66.8 million, or $0.20 a share.

The company is improving its customer service. That should help it hang onto its current clients. It is also spending more on marketing to attract new clients. Despite these moves, H&R Block will probably prepare 2% fewer returns in the current tax season. However, the tax code continues to grow more complex. That should let it keep raising its fees.

The stock trades at 11.9 times the $1.43 a share that H&R Block is likely to earn in fiscal 2010.

H&R Block is a hold.

BROADRIDGE FINANCIAL SOLUTIONS INC. $22 (New York symbol BR; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 134.8 million; Market cap: $3.0 billion; Price-to-sales ratio: 1.3; Dividend yield: 2.6%; WSSF Rating: Average) serves the investment industry in three main areas: investor communications; securities processing; and transaction clearing. The company mails and processes 70% of all proxy votes.

Broadridge stands to gain as more investors buy shares during the stock-market rebound. It should also benefit as securities regulations become more complex. As well, lower prices for computer hardware and software are driving down its operating costs.

In its second quarter, which ended December 31, 2009, Broadridge’s earnings before one-time items jumped 76.2%, to $0.37 a share from $0.21 a year earlier. Revenue rose 21.1%, to $529.7 million from $437.5 million.

The company continues to buy back shares. It bought back roughly 6.1 million of its common shares during the six months ended December 31, 2009. It paid an average price of $21.43 per share.

Broadridge trades at 13.8 times its likely fiscal 2010 earnings of $1.59 a share.

Broadridge is a buy.