Franklin Resources (BEN, Financial) manages the Franklin and Templeton families of mutual funds. The company was founded in 1947 and has paid increasing dividends for 34 consecutive years.
Franklin Resources' total returns over the last 20-plus years has been nothing short of phenomenal:
Source: Franklin Resources 2014 Investor Presentation, slide 36
There are very few stocks that can compete with the profit-generating abilities of both Warren Buffett (Trades, Portfolio) and Steve Jobs – but Franklin Resources has done just that.
The investment management and mutual fund industry has been a very good business for a long time – but growth is beginning to slow for Franklin Resources as the investing industry slowly shifts to low-cost providers that don’t charge 1%-plus of assets under management.
Business overview
Franklin Resources is diversified in many different ways. The company’s assets under management are broken down below.
Diversification by asset class:
- 42% equity
- 40% fixed income
- 17% hybrid
- 1% cash management
Geographic diversification:
- 65% United States
- 17% Europe, Middle East and Africa
- 10% Asia-Pacific
- 4% Latin America
- 4% Canada
Type of investor diversification:
- 75% Retail investors
- 24% Institutional investors
- 1% High net worth investors
Historical growth and changing markets
Franklin Resources has compounded its earnings per share at 11.4% per year over the last decade. Simply put, the company has realized excellent results over the last 10 years.
From 1999 through 2007 the company saw even faster growth, compounding earnings per share at an amazing 18.2% per year.
Despite rapid historical growth, the future does not look particularly bright for Franklin Resources.
Franklin Resources saw assets under management decline 14% and earnings per share decline 13% in fiscal 2015.
There are two primary reasons for these declines:
- Franklin Resources’ funds are performing poorly, and
- Franklin Resources is expensive relative to other options.
To the first point, only 24% of Franklin Resources’ mutual funds (based on assets under management) were in the top 50% of mutual fund performance (in their respective categories). When you charge for investing, but you get trounced by your peers, your business has a real problem.
Historically, Franklin Resources’ funds have beaten their peers. Over the last decade, 80% of the company’s funds (based on assets under management) have been above average.
The company’s one-year numbers look worse than three-year numbers which look worse than five-year numbers, which look worse than 10-year numbers. Simply put, Franklin Resources’ ability to invest better than its peers is going away – and is very likely already gone. That’s the company’s real competitive advantage, and it appears to no longer exist.
Even if the company is able to return to average performance (which really isn’t asking a lot), the internet continues to change the investment industry. Now, individual investors can easily buy and sell stocks through discount brokers. They can learn all about investing through a litany of websites and newsletters.
It’s true – a lot of information out there is not great (to put it mildly), but some is exceptionally valuable and inexpensive (I believe the Sure Dividend newsletter to be both very valuable and very affordable – but I’m a little biased).
ETFs and "robo investors" are also revolutionizing the industry. Now it’s possible to invest in ETFs for less than 0.1% of assets under management – that’s dirt cheap, and it makes the value proposition for companies like Franklin Resources look weak by comparison. Why pay 10x what an ETF charges for worse results? I don’t see any reason to, and I believe more and more "retail investors" (normal people) are thinking the same way. I also believe this trend will only continue over the next several years.
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 for the 2007 to 2009 recession and subsequent recovery are shown below:
- 2007 earnings per share of $2.37
- 2008 earnings per share of $2.24
- 2009 earnings per share of $1.30
- 2010 earnings per share of $2.12
- 2011 earnings per share of $2.89
As you can see, earnings 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.
Valuation and final thoughts
Franklin Resources is not your typical Dividend Aristocrat. The company’s competitive advantage is by and large dependent upon investment returns relative to its peers.
On the bright side, Franklin Resources is trading at a price-to-earnings ratio of just 11.7. The company could offer value investors a nice short-term return if it returns to beating its peer group over the next few years. This would cause the company’s valuation multiples to revise upwards, as well as earnings themselves to increase.
Still, the odds of this are likely 50-50, at best. Given the changing nature of the investment industry, I believe Franklin Resources does not make a compelling long-term investment for dividend growth investors looking for true buy and hold investments.
