In this article, let's take a look at The Bank of New York Mellon Corporation (BK, Financial), a $43.89 billion market cap company, which is a leader in securities processing, and also provides a range of banking, asset management and other financial services.
Top Three Custody Bank
The bank is a great player in the business of asset custody and servicing. With more than $28 trillion in client assets, it is one of the largest and a major provider of back-office services to institutional investors. The custody business is characterized by efficient scales, and the bank the benefits from this.
Although the industry is sensitive to interest rate changes, we believe that it will experience an increase in revenues as interest rates will rise sooner or later.
This giant focuses on achieving great operating leverage, helped by its strategic acquisitions. For example, it has acquired over 90 businesses over the past decade.
Returning Value
The company paid out of its earnings to investors in the form of cash dividends. Dividends totaled $593 million in 2011, $623 million in 2012, $680 million in 2013, and $761 million in 2014. Dividends have been paid since 1785.
Revenues, Margins and Profitability
Looking at profitability, revenues rose by 2.71% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.7 vs $0.44).
The net income increased by 54.2% when compared to the same quarter one year prior, from $539.00 million to $831.00 million.
The gross profit margin is currently very high, at 97.59% and it has increased from the same quarter the previous year. The net margin of 20.17% is ranked higher than 53% of the 1597 Companies in the Asset Management industry.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| BK | Bank of NY | 8.32 |
| BLK | BlackRock Inc | 14.87 |
| BEN | Franklin Resources Inc | 21.03 |
| STT | State Street Corp | 9.85 |
| IVZ | Invesco Ltd. | 11.77 |
| BX | Blackstone Group LP | 16.44 |
| Industry Median | 8.23 |
The company has a current ROE of 8.32% which is higher than the industry median, but it is lower than its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Franklin Resources (BEN, Financial) and Blackstone Group (BX, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Year | ROE (%) |
| Dec05 | 16.39 |
| Dec06 | 28.27 |
| Dec07 | 9.99 |
| Dec08 | 4.94 |
| Dec09 | -3.80 |
| Dec10 | 8.21 |
| Dec11 | 7.65 |
| Dec12 | 7.00 |
| Dec13 | 5.71 |
| Dec14 | 8.38 |
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 16.1x, trading at a discount compared to an average of 22.4x for the industry. To use another metric, its price-to-book ratio of 1.19x indicates a premium versus the industry average of 1.03x while the price-to-sales ratio of 2.86x is below the industry average of 9.14x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $15.580, which represents a 9.3% compound annual growth rate (CAGR).
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Final Comment
As outlined in the article, the importance of scale is relatively high and benefits the bank towards new entrants. The net income growth from the same quarter one year ago has significantly exceeded the industry.
We continue believe a scenario of volatile capital markets with a low interest rate environment, but I feel optimistic on this stock because an increase in revenues would happen when interest rates rise. Moreover, the PE relative valuation makes me feel bullish on this stock.
Hedge fund gurus like Charles Brandes (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio)m, John Buckingham (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) have added this stock to their portfolios in the last quarter of 2014, as well as Caxton Associates (Trades, Portfolio), HOTCHKIS & WILEY, Dodge & Cox and NWQ Managers (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
