KKR, Blackstone and Carlyle were all built on stellar performance, with investment portfolios outperforming the S&P 500 over a period of decades. Now, as public vehicles, the hope was that shareholders could profit along with fund holders who are usually qualified institutional investors. If you’re looking for a solid dividend payer with long-term growth potential, each of these company’s stock are excellent trades right now.
No. 1
KKR & Co. (KKR, Financial)
Market cap: $12.4 billion
Forward price-earnings: 10.9
Dividend yield: 2.72%
KKR was established in 1976 and was the first private equity firm. Today it manages over $148 billion, but the company’s financial performance is too sporadic to value correctly. In the last five years, KKR earned over $7 per share and while analysts expect KKR to earn over $3 a share in 2019, there is absolutely no reason to chase the stock here near its 52-week high.
The company is converting from a partnership to a C-corp with changes to take place July 1, and may reduce the annualized dividend to 50 cents per share. That payment should grow over the long term as KKR continues to raise more capital. In the short term, the firm will see gains from exits across its real estate and infrastructure funds as it focuses on developing permanent capital vehicles.
No. 2
Blackstone Group (BX, Financial)
Market cap: $38.5 billion
Forward price-earnings: 11.2
Dividend yield: 6.86%
Blackstone was founded in 1985 and is the largest private equity firm, managing over $450 billion. The biggest challenge is that with so much money under management, it becomes really hard to earn performance fees. Yet even though management fees are coming down, paying just 1% still produces over $4.5 billion a year in revenue for the firm.
Better results are coming this year and next thanks to tax reform as analysts expect $3 a share in 2018 and upwards of $4 a share in 2019. That, coupled with the company expanding its repurchase program to $1 billion, should boost the stock’s performance.
No. 3
The Carlyle Group (CG, Financial)
Market cap: $7.4 billion
Forward price-earnings: 9.4
Dividend yield: 7.17%
Carlyle was founded in 1987 after observing the money being made with leveraged buyouts in the 1980s. Today it manages over $200 billion. Carlyle pays out over 7% in annual dividends (that will be lower in 2018), more than KKR (2.72%) and Blackstone (6.9%).
Just like at KKR and Blackstone, revenues fell at Carlyle because of a drop in performance fees. However, it is on a big money raise right now with an expected $100 billion to flow in by 2020. If successful, Carlyle will have north of $300 billion, which at 1% would bring in $3 billion in management fees, assuring the dividend and opening the potential for even higher performance fees trickling down to earnings per share and dividend payments.
Around 71% of its funds are carry-eligible, meaning that a large portion of fund growth will translate to performance fees.
With a market capitalization of just $7.4 billion, Carlyle is the most undervalued of the three by far. Both KKR and Blackstone are valued at more than 8% of their assets under management, while Carlyle sits at 3.7%. At 8%, the cap would be in the $16 billion range, which makes a lot more sense considering it’s the second largest private equity firm, has been super successful with its portfolio, and by 2020 could have more than $300 billion under management.
Each of these firms have garnered guru investments from names like Ron Baron (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Julian Robertson (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), John Rogers (Trades, Portfolio) and Chuck Akre (Trades, Portfolio). Moreover, Jim Simons' (Trades, Portfolio) Renaissance Technologies owns small positions in each and Jeff Ubben (Trades, Portfolio)’s ValueAct owns 10% of KKR. Worst case, a small position in each would give an investor core exposure to an industry that should only become more valuable in the next five, 10 and 20 years.
Disclosure: I am not long/short any of the stocks mentioned in this article.
