TipRanks Smart Dividend Newsletter – Edition #34
Hello and welcome to the 34th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is the world’s largest money manager, one that demonstrates stellar fundamentals and strong growth prospects along with ever-rising shareholder returns.
Investment Thesis: Conquering the Money Currents
The investment management industry is a vital component of global economic stability and growth. This sector is undergoing a significant transformation, fueled by technological advancements and shifts in investor behavior.
Key players in this space are driving technological change, and adopting innovations to enhance investment strategies, risk analysis, and decision-making efficiencies.
Additionally, the growing prominence of Exchange-Traded Funds (ETFs), alternative investments, and other expanding venues, reflect the industry’s response to investor demands. Financial firms that can meet the needs of a diverse range of investors – from large institutions to individuals – are the main benefactors of the currents changing the whole asset management industry.
Investing in stocks of this sector’s leaders means aligning with companies that demonstrate strong financial fundamentals, diversified product portfolios, and a strategic focus on leveraging technology to optimize market presence and efficiency. The best firms in this industry are known for their steady growth, resilience in various economic conditions, and potential for long-term profitability.
Quality Dividend Stock: This Week’s Top Pick
BlackRock, Inc. (BLK) is a global investment management company, offering investment management, risk management, and advisory services for institutions, financial professionals, corporates, governments, official institutions, educational and nonprofit organizations, and individuals.
BlackRock has $10 trillion in AUM, with a market capitalization of $119 billion and a workforce of almost 20,000 employees in offices around the globe.
The company is best known for its iShares group of ETFs, the largest global provider of exchange-traded investment products. iShares provides institutional and retail clients with access to all asset classes, investment themes, and geographies. BLK offers more than 1,300 different iShares ETFs, which are used by over 40 million individual investors.
In addition to the ETF products, BlackRock manages stock, bond, multi-asset, commodity, real estate, and money-market mutual funds. The firm also offers hedge funds, offshore funds, unit trusts, and alternative investment vehicles including structured funds. Furthermore, BLK manages investment portfolios and pension plan investments, while providing global risk management and advisory services.
The firm has also built a proprietary technology platform called “Aladdin” (“Asset, Liability and Debt and Derivative Investment Network”), which has been BLK’s significant differentiator since its introduction in 1999. Aladdin acts as a central processing system for investment management, integrating and connecting all functions relevant to money management, including portfolio management, trading, compliance, operations, risk oversight, and others. Aladdin is used by over 850 global investment managers, pension plans, and numerous insurers, alternative investment managers, and other financial professionals in 68 countries around the globe. Constantly investing in technological development, BlackRock is currently in the process of integrating artificial intelligence (AI) copilots. The company launched its first AI Lab, aimed at accelerating its use of artificial intelligence, back in 2018.
BlackRock was founded in 1988 by eight people, including Larry Fink, who continues to serve as the company’s CEO. At first, the firm focused on fixed-income investments, becoming one of the largest fixed-income managers in the world by the mid-1990s.
In 1999, the firm became publicly traded on the New York Stock Exchange (NYSE), reporting $165 billion in assets under management (AUM). At the same time, BlackRock began expanding its offerings to equities, alternative investments, and more.
In 2000, BlackRock launched BlackRock Solutions, its analytics and risk management division, which took over the responsibility for managing and developing Aladdin. In 2019, BLK acquired eFront, the world’s leading end-to-end alternative investment management software and solutions provider, whose combination with Aladdin further enhanced BlackRock’s technological advancement, vastly expanding Aladdin’s alternatives capabilities and providing a whole-portfolio technology solution to clients.
In the years that followed, BlackRock grew both organically and through numerous acquisitions. In 2004, the company made its first major acquisition: it bought State Street Research & Management’s holding company SSRM Holdings from MetLife (MET).
The most important acquisition, one which marked a turning point in the firm’s history, was made in 2006 when BLK purchased Merrill Lynch & Co.’s investment management business for $9.7 billion. The buyout doubled BlackRock’s AUM, helped vastly expand its capabilities, and solidified its status as a global leader in asset management.
Another transformative acquisition was made in 2009, when BlackRock bought Barclays’s (BSC) Global Investors Unit, which included its exchange-traded fund business, iShares. The acquisition, valued at $13.5 billion, catapulted BlackRock to its status as the world’s largest investment manager, which it has held ever since.
In January 2024, BLK announced its largest acquisition in 15 years, expected to close in the second half of the year: a buyout of a private-equity firm Global Infrastructure Partners (GIP) for $12.5 billion in cash and stock. GIP is an infrastructure fund manager with about $110 billion under management, which includes stakes in Gatwick, Edinburgh, and Sydney airports, as well as in various ports, pipelines, data centers, and other assets. The acquisition is the result of BlackRock’s push into private market operations, a faster-growing and potentially more profitable business area than traditional asset management. Meanwhile, infrastructure investment is the fastest-growing asset class in private markets. The deal will boost BlackRock’s private assets under management by a third while doubling its management fees from private markets.
BlackRock’s financial health is more than stellar. It has a minute net debt-to-equity ratio of 6.5%; its strong liquidity position is underscored by a quick ratio of 1.4 and a current ratio of 2.1. BLK’s debt is highly rated by major rating agencies: “Aa3” at Moody’s and “AA-“ at S&P Global, representing the second-highest notch within the highest level of the ratings scope.
While BlackRock’s Return on Equity (ROE) of 14.2%, ROA of 4.5%, and ROIC of 4.5% may seem mediocre, they are much higher than averages for firms in the Investment Management industry, reflecting BLK’s high capital efficiency. In addition, the company boasts industry-beating profitability, reflected in its margins, such as a gross profit margin of 49.1%, EBITDA margin of 38.6%, operating margin of 36.2%, and net profit margin of 35.5%.
The company’s business is diversified across clients, products, and geographies. As of December 2023, BLK derived 40% of its fees (its main revenue source) from ETF management, 32% from institutional clients, and 28% from retail investors. Sliced by investment style, 48% came from passive funds (ETFs and Index funds), 45% from actively managed products, and 7% from money-market funds. Geographically, the Americas were responsible for 64% of income, Europe, the Middle East, and Africa (EMEA) for 30%, with Asia accounting for the remainder. As for product types, management fees derived from equity investments accounted for 49% of revenue and fixed income for 24%. Notably, Alternatives, which represented just 3% of AUM, were responsible for 12% of fee income, supporting the case for BLK’s strong push into this lucrative territory.
On January 12, BlackRock reported its Q4 2023 and full-year 2023 results. In the last quarter of the past year, the company exceeded analysts’ revenue and EPS estimates, as it did in every quarter since these estimates became available, with a sole exception in Q2 2022. Revenue rose by 7% year-over-year, adjusted operating income increased by 9%, and adjusted net income was up by 7%. Adjusted diluted EPS increased by 8.2% from the previous year.
In 2023, BLK’s assets under management increased to over $10 trillion, following inflows of $290 billion, representing an annual increase of 16% in AUM. iShares ETFs saw $186 billion in net inflows during the year. BlackRock has launched 19 new ETFs during 2023, including a Bitcoin fund.
Despite that, revenue was flat from 2022, mainly on the back of weaker distribution fees as well as lower investment advisory, administration fees, and securities lending revenue. These were partially offset by surging technology services revenues and higher investment advisory performance fees.
Within the earnings release, BLK announced two major changes: an acquisition of GIP, detailed above, and a strategic restructuring, partly related to the acquisition. BLK plans on reorganizing several platforms within the firm, primarily Aladdin and alternative investments, to streamline and improve their services.
In the same earnings call, the company’s management announced another dividend increase. BlackRock has been paying dividends since 2003, consistently increasing the annual payouts since 2009. During the GFC, when many companies, specifically in the Financial sector, were forced to cut their dividends, BLK kept its payout unchanged, returning to dividend increases as soon as the skies became clear. In the past decade, dividends increased at an average annual rate of 11.8%.
BLK’s current dividend yield is 2.52%, higher than the Financial sector’s average of 2.11%. With a moderate payout ratio of 43%, which is backed by strong profitability, and a 15-year track record of consistent payout increases, the company is well-positioned to continue raising its dividends for years to come.
In addition to dividends, BlackRock compensates its shareholders through opportunistic buybacks. Thus, in the past decade, BLK reduced its total stock count by about 7%, with $7.9 billion in shares repurchased. In 2023, the company purchased its shares for the amount of $1.5 billion. BlackRock has a consistent capital management policy, which includes organic business investments, tactical and strategic acquisitions and investments, dividends, and stock repurchases.
BlackRock’s stock, along with all Financial sector shares as represented by Financial Select Sector SPDR Fund (XLF), underwent a difficult period in 2023, with two large drops during the year: at the time of the regional banking crisis in March, and during the overall market weakness in August through October. While BLK increased by just 6.7% in the past 12 months, it still outperformed the ETF (where it is the tenth-largest holding). The largest chunk of the outperformance came in the last few months, as BLK’s shares surged by 34% from their recent lows on October 30, strongly outperforming both XLF and the broader market.
As a result of its recent, strong upward move, BlackRock’s stock is trading at rather pricey valuations, with its TTM P/E of 21.6 and Forward P/E of 20.6 higher than the overall Financial sector averages. However, when compared to its peers in the Asset Management industry, BLK is situated in the middle of the price range.
Given the stock’s strong upward momentum, propped up by its superior performance, robust growth prospects, and wide economic moat, the relatively moderate valuations may not remain such for much longer. TipRanks-scored top Wall Street analysts rate the stock a “Strong Buy” and forecast an average upside of 9.3% over the next 12 months.
In conclusion, BlackRock, Inc. is an investment powerhouse that does not stop positively surprising on delivery. This largest money manager in the world possesses both technological prowess and adaptivity to changes unmatched in the slow and stable world of finance. These factors, coupled with BLK’s stellar fundamentals, strong profitability metrics, and coherent capital management policy which excels in aligning with shareholder interests, make it a compelling long-term income opportunity for dividend investors.
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