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Jonathan Poland
Jonathan Poland
Articles (475)  | Author's Website |

The Best High-Yield Stock in Private Equity

Blackstone Group is undervalued at $32 per share

April 18, 2018 | About:

As alternative asset managers go, Blackstone is in a league of its own. The firm manages almost half a trillion dollars in assets -- $434 billion at the end of 2017 to be precise. More than twice its leading competitor Carlyle Group. Off of this massive AUM, Blackstone generated $1.4 billion in net income and $7.1 billion in revenue. That was on the back of solid fourth quarter results where revenue expanded 14% year-over-year thanks to strong performance fees.

Private equity returns were 6.8% during the quarter, and its real estate portfolio was up 5.2% year-over-year. This allowed Blackstone to continue its fundraising endeavors. Again, it manages over $434 billion, an 18% increase from the previous year.

The price is lower today than at its IPO, but it has paid out north of $15 a share since 2008. It pays a healthy 8.5% dividend currently, which will continue to grow over time.

It company is making a killing in emerging markets, generating returns well over 30% in recent years. It employs the best and brightest and has the capital to make direct purchases or sizable passive investments in almost any asset.

Blackstone has a record amount of assets under management, which means higher management fees over the short term, but it is the firm’s ability to generate profit on longer-term investments that will make investors happy to own the stock at this price. In fact, Blackstone has about $95 billion waiting to be allocated. One purchase will be the 55% stake in Thomson Reuters' information platform for $20 billion. The platform has over 400,000 customers, is similar to Bloomberg Professional and will provide Blackstone with a highly profitable recurring stream of revenue with expected Ebitda over 25% on $1.55 billion quarterly.

Other sizable positions might be in the works, including one planned for $4.6 billion in Japan. Tax reform will boost Blackstone investment positions as cash flow and earnings announcements roll in all year. All told, the firm could be generating 100% more in profit per share in the next five years, moving the majority of that down to shareholders via the quarterly dividend, which has historically been slightly higher than the earnings per share figure. With that in mind, at 10x earnings, the stock looks cheap considering over that time an investor may receive upwards of $20 worth of dividends.

Blackstone CEO Steve Schwarzman owns roughly 20% of the company and takes home before taxes the lion’s share of dividend payments. So even at 71, he’s aligned his family with the company’s success. Other notable investors in Blackstone include Jim Simons (Trades, Portfolio) with 2.29 million shares, Julian Robertson (Trades, Portfolio) with 949,000 shares and Tom Gayner (Trades, Portfolio) with 850,000 shares. Even if you just match their positions with a flyer of your own, it's worth investing in Blackstone at its current price.

Disclosure: I am not long/short Blackstone.

About the author:

Jonathan Poland
I used to manage money. I still publish my thoughts on stocks here on GuruFocus, mainly on big cap companies. I rarely write about stocks that I own. Thank you for reading.

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