When I last wrote about BlackRock, Inc. (BLK, Financial) on May 3, the stock was trading around $480, and I believed dividend investors should be enticed by the 3% yield at the time because of the company’s balance sheet strength and the beaten-up share price.
Since then, the stock has gained 23% to settle over $587 on July 17. The broad market rally and the stellar financial performance of the company in the second quarter were the drivers of the stock in the last couple of months.
Even on the back of recent gains, I think BlackRock is still a promising investment considering the expected recovery of the global economy and the growth projections for investable assets in many developing regions.
Earnings snapshot
The largest asset manager in the world reported a 22% year-over-year growth in earnings for the second quarter, even though net inflows declined approximately 50% in comparison to the corresponding period last year.
Source: Investor presentation
According to company filings, the adjusted operating profit margin increased by 60 basis points as a result of a reduction in general and administrative expenses. The company continues to remain focused on improving its profitability by carefully monitoring expenditures to identify opportunities to reduce costs while maintaining efficiency.
Shareholders are not left behind
The asset manager takes rewarding investors seriously, which is evident from its stellar track record of distributing dividends consistently and buying back shares when the time is right. In line with expectations, BlackRock declared a quarterly dividend of $3.63 for the second quarter. The company has hiked its annual distributions for 16 consecutive years.
The stock repurchase program is proving to be value accretive as well. First, this is an indirect income source for investors as wealth is transferred in the open market. Second, the reduction in the total number of shares outstanding helps BlackRock report higher earnings per share. This creates a strong platform for the stock to trade at higher prices even if the earnings multiples do not expand. In the second quarter, the company repurchased stock worth $1.1 billion, and below is a visualization of how the share count has declined over the last couple of years.
Source: Investor presentation
BlackRock stock is trading at a dividend yield of 2.47% on July 20, and the buybacks are enhancing the real yield enjoyed by an investor. During the earnings conference call on July 17, Chief Financial Officer Gary Shedlin said:
“Our capital management strategy remains first to invest in our business and then return excess cash to shareholders through a combination of dividends and share repurchases. During our first-quarter earnings call, we reaffirmed commitments to both our dividend and share repurchase plans for the year. In late April, we completed the debt issuance to increase liquidity in the current environment, take advantage of historically low interest rates, and pre-refinance our $750 million 4.25% notes due May 2021.”
The strong liquidity position and the expected earnings growth provide the much-needed security for dividend investors amid these challenging times.
BlackRock’s scale is expanding
In just 22 years since its establishment, the company has secured the top spot in the global asset management industry thanks to the visionary management team that focuses on providing top-notch service to its clients. For instance, while its competitors were looking for ways to thwart the threat from robo advisory services, BlackRock decided to acquire FutureAdvisor in 2015 to embrace the new technology. Such revolutionary decisions, along with the impressive talent the company has hired over the years to manage funds, have been key for the company to remain at the helm of the industry.
The decision by The New York Fed to hire BlackRock in March to execute the purchase of commercial mortgage-backed securities of over $50 billion is a clear indication of the company’s increasing dominance over other financial services companies. Historically, investment banks such as The Goldman Sachs Group, Inc. (GS, Financial) and JPMorgan Chase & Co. (JPM, Financial) have been the go-to option by the Fed to help them facilitate open market transactions. This time around, however, BlackRock secured this spot. In a press release, the Fed noted:
“BlackRock was selected on a short-term basis to serve as an investment manager after considering their expertise in trading and analyzing agency CMBs in the secondary market, and robust operational and technological capabilities.”
BlackRock’s collaboration with policymakers will leave a lasting impact on the company’s image as a trustworthy investment manager, which will further cement its market-leading position. The company already enjoys competitive advantages as a result of its high-quality index funds range and the company is on a mission to spend billions of dollars to improve the technological aspects to provide a robust experience to existing and potential clients.
The industry outlook
According to data compiled by Bloomberg and the projections of analysts, the primary driver of fund flows to the asset management industry will be the introduction of new products. For instance, leading players in this sector have unveiled actively managed exchange-traded funds to cater to the requirements of risk-seeking investors. Another example is the growth of robo advisory services and automatic investment schemes.
Source: Bloomberg
Technological advancements will be another key driver of the industry as a tech-savvy younger generation is developing a keen interest in saving and investing money. CNBC reported in May that a record number of 3 million trading accounts were opened in the first quarter by retail traders on the popular Robinhood app that provides a seamless experience to novice investors. Access to stock market investing is no longer limited to high-net-worth individuals as a result of zero-cost trading facilities introduced first by smartphone apps and now by renowned brokers. These developments, collectively, will lead to a boom in total assets managed by the industry, and BlackRock is well-positioned to capture a share of this expected growth.
Household assets in many countries around the world have grown rapidly since 2015 and are expected to hit new highs in 2021 as the global economy recovers from the current downturn. This is good news for the investment management industry as consumers will turn to asset managers to grow their wealth.
Source: Broadridge Wealth and Asset Management
Asset management companies will enjoy favorable industry conditions for many years to come, accoding to my analysis, and the companies leading the pack (such as BlackRock) are in a good position to double-down on this growth opportunity.
Takeaway
BlackRock is distancing itself further from its peer group by continuing to deliver strong numbers even amid challenging conditions. Historically, the asset management industry has shed billions of dollars in market value during economic recessions. This time around, however, BlackRock is making history by beating the market handsomely because of its ability to grow from multiple fronts. Edward Jones analyst Kyle Sanders wrote in a note to investors:
“Historically, BlackRock has been very opportunistic during fragile markets and we anticipate the company will continue to utilize its strong financial condition to invest in new products, distribution, and technology over the next few quarters to widen the competitive gap over peers.”
I think there is more upside to be captured in the stock as the company is aggressively investing to improve both its products and technological capabilities. The favorable long-term outlook for the industry will be a catalyst for growth as well.
Disclosure: I do not own any stocks mentioned in this article.
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