Paying Out for a Pair of Financials

I try to keep my portfolio well diversified across the different S&P sectors when prudent and possible. My portfolio was very light in the financial sector due to the turmoil in the financial industry over the past five years and the continued challenges within the sector. However, I made a concerted effort to research how I could add positions in the sector and be comfortable with the increased exposure to this volatile area. I decided to focus on names that are not impacted by residential real estate, have stayed out of the line of fire from legislators and will be minimally impacted by increasing regulation coming out of D.C. I also wanted to find stocks with low valuations and solid dividend yields. Here are two that made the cut.

The Blackstone Group ( BX) provides alternative asset management and financial advisory services worldwide including private equity, real estate investments and hedge funds.

Four reasons BX is a solid buy at $13 a share:

1. Blackstone yields a solid 3.1% currently. Credit Suisse estimates it will pay out $1 a share in dividends in fiscal-year 2013 implying a dividend of more than 7% at current price levels.

2. Earnings are on a sharp upward projected path. The company made $1.25 a share in fiscal-year 2011, but analysts have that moving up to $1.56 a share in fiscal-year 2012 and $2.04 in fiscal-year 2013.

3. BX is cheap. The stock has a five-year projected PEG of just .58, is priced at 6.5x forward earnings and is projected to grow revenues north of 20% in both fiscal-year 2012 and fiscal-year 2013. It has doubled assets under management since its IPO in 2007.

4. The stock has strong technical support at just $12 and recently had a solid bounce off that level.

Lazard ( LAZ) operates as a financial advisory and asset management firm. The company operates from 42 cities across 27 countries.

Four reasons Lazard is a buy at $26 a share:

1. Lazard yields 3.1% and has doubled its dividend payouts over the past four years.

2. The company increased operating cash flow by approximately 75% from fiscal-year 2009 to fiscal-year 2011. Lazard also pays out 62% of revenues in compensation, materially higher than competitors. It has initiatives under way to lower that ratio which would improve margins significantly.

3. LAZ is selling near the bottom of its five-year valuation based on P/B and P/CF. It is selling at 13.4 forward earnings, a discount to its five-year average (15.7).

4. S&P has given Lazard its highest rating of Strong Buy and a $32 price target on the stock. Plus, Credit Suisse has an Outperform rating on the stock.

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