In part 15 of the 54-part series on Dividend Aristocrats, we will look into the operations of asset manager Franklin Resources (BEN, Financial). Franklin Resources manages the Franklin family of mutual funds and the Templeton family of mutual funds. The company was founded in 1947 and has paid increasing dividends for 33 consecutive years. Franklin Resources is the 4th largest publicly traded asset management company by market cap, behind only BlackRock (BLK, Financial), The Bank of New York Mellon (BK, Financial), and The Blackstone Group (BX, Financial).
Business Overview
Franklin Resources is well diversified in many aspects. The company’s funds are split nearly evenly between equity and fixed income markets. Franklin Resources is somewhat geographically diversified, with 65% of assets under management in the U.S. and 35% of assets under management coming from international markets. The company is also diversified between retail and institutional investors. About 75% of assets under management come from retail investors, with 24% coming from institutional investors and 1% from high net worth individuals.
Source: 2014 Franklin Resources Investor’s Day
Despite having just 35% of assets under management in international markets, Franklin Resources has taken great strides to set up sales and research offices throughout the world. It has had the most success so far in Canada, Italy, and Germany.
Source: 2014 Franklin Resources Investor’s Day
Competitive Advantage
Franklin Resources competitive advantage comes from its global research team and the strong performance of its funds, which routinely rate in the top 50% of their respective peer group. Currently, 88% of the company’s funds rank in the top 50% of their peer groups over a 10-year period.
Source: Third Quarter Franklin Resources Presentation
The company has realized this strong performance on the strength of its research team. The company takes a disciplined approach to fund investing. Moreover, Franklin Resources has offices located around the globe, which gives the company an advantage in international investing that smaller asset managers simply cannot recreate. The image below shows the various research offices Franklin Resources has established over the last several decades to build an edge in international investing.
Source: 2014 Franklin Resources Investor’s Day
Growth Prospects
Franklin Resources has grown assets under management at 9.7% per year over the last decade, despite the 2007 to 2009 recession. Much of this growth has come internationally. The dark blue segment of the image below is international AUM, and the light blue segment represents U.S. AUM.
Source: 2014 Franklin Resources Investor’s Day
Going forward, Franklin Resources will likely realize a disproportionate amount of its AUM growth from international markets. The U.S. economy is simply growing slower than emerging markets. Franklin Resources has positioned itself well to take advantage of specific quickly growing economies. Franklin Resources has shown exceptional foresight with India in particular. The company set up offices in India in 1993 and currently has equity, fixed income, and private equity capabilities in the country through its offices in Chennai, Hyderabad, and Mumbai. In addition, Franklin Resources has offices in Moscow, Dubai, Shanghai, Hong Kong, and Bangkok, among others.
Aside from international growth, Franklin Resources has experienced rapid growth in alternative investments. As investors continue to realize the benefits of diversification brought about from commodities and other alternative asset classes (hedged investments, currency, etc.) demand for liquid investment vehicles which provide access to these asset classes is growing. According to their website, Franklin Resources only has 2 funds dedicated to this space. The company has a largely untapped market in the alternative investment area that it could use its trusted name to capitalize on. I expect the company to roll out more options for this category in the future to bolster growth.
Franklin Resources has been a net repurchaser of shares over the last decade. The company has reduced its share count by about 2% a year over the last 10 years. Strong share repurchases enhance per share earnings and revenue, growing the company by increasing ownership for investors. The company’s strong asset under management growth, share repurchases, and future growth potential in both international markets and alternative strategies makes me believe Franklin Resources has room to continue growing earnings per share at more than 10% a year for the next several years. The company has rewarded shareholders very well historically. The chart below shows the company’s total return in relation to overachieving stocks Apple (AAPL) and Berkshire Hathaway (BRK.A & BRK.B).
Source: 2014 Franklin Resources Investor’s Day
Valuation
Franklin Resources is currently trading for a PE ratio of 14.4, and a forward PE ratio of just 12.7. The company has historically traded for a PE ratio of about 20 before the Great Recession of 2009. The stock appears undervalued based on its historical PE ratio compared to its current PE ratio.
The company trades well below the S&P 500’s PE ratio of close to 19. It is also cheaper than its large cap peers in the asset management space. The median PE ratio for large cap asset management companies is 16.2; Franklin Resources is trading 12.5% under its peer group. Overall, I believe the company is undervalued by about 25% based on its comparison to its historical PE ratio, the overall market, and its peer group. A 25% rise in Franklin Resources price would put the company’s PE ratio at 18, which is closer in line with the company’s strong historical growth, growth potential, and history of rewarding shareholders.
Dividend Analysis
Despite being a Dividend Aristocrat, Franklin Resources has a low dividend yield of just 0.9%. The company has an exceptionally low payout ratio of 13%. The company obviously has significant room to increase its dividend faster than overall company growth. The company’s most recent dividend increase to $0.12 per quarter was a 20% hike over previous levels. This is an encouraging sign, and shows management may be willing to grow dividends faster than overall company growth by increasing its target payout ratio.
Recession Performance
As one would expect for an asset management company, Franklin Resources sees steep declines in earnings during recessions. The company’s earnings per share and revenue per share for the 2007 to 2009 recession (and 2010 recovery) are shown below:
- 2007: EPS of $2.37, revenue per share of $5.99
- 2008: EPS of $2.24, revenue per share of $6.19
- 2009: EPS of $1.30, revenue per share of $4.22
- 2010: EPS of $2.12, revenue per share of $5.91
As you can see, earnings per share and revenue per share fell steeply in 2009 during the worst part of the most recent recession. As asset values decline, the company’s management fees fall. People tend to liquidate their investments or sell out due to fear during recessions, which further reduces assets under management for Franklin Resources. The company saw a nearly 50% decline in earnings per share from 2008 to 2009. The company rebounded quickly, and earnings per share reached new highs by 2011. The company’s steep declines during recessions have made the stock price more volatile than other low volatility Dividend Aristocrats.
Final Thoughts
Franklin Resources is not your typical Dividend Aristocrat. It is more similar to a growth stock with its high asset under management growth rate and low dividend yield than a mature dividend paying company. The underlying business is solid, but does not possess a competitive advantage that protects against recessions. As a result, I believe there are better investment opportunities available for dividend growth investors looking for higher yields than Franklin Resources offers.
