Introduction: This article provides bullish commentary on two of my favorite stocks, the well-known asset manager BlackRock (BLK) and the less-well-known insurer and financial services firm, Lincoln National (LNC).
BlackRock: BlackRock, Inc. is the well-known marketer of the iShares family of ETFs. There are 281 iShares individual funds. These include 200 equity funds, both U.S.-focused and international, 51 fixed income funds, and a small number of commodities and specialty funds. BlackRock has nearly $4 trillion assets under management (AUM) and had revenue of $9.3 B in 2012. It is mostly oriented to institutions, with iShares comprising an additional 22% of its business. BlackRock bought out Merrill Lynch's long-term equity stake in it in 2011 and since then has been growing its non-Merrill business (which remains substantial).
The stock has been a dynamic performer under the leadership of Laurence Fink, who is widely recognized as one of the great CEOs in America. BLK went public in 1999 and has this price chart:
The IPO was at $13.50/share. BLK is now $257. This is about a 24% compound annual return on price alone. Initially it paid no dividend, but now has a high dividend payout ratio. Current yield is 2.6%. A core reason I like the stock is that even though the stock is in new high ground, BLK is trading below its historical P/E. Value Line lists BLK's average P/E since going public at 23.0. Earnings, sales and cash flow have all grown around 19% per year for the past 10 years, and these have accelerated to the 23-26% range for the past 5 years.
The company is both retiring shares and growing the dividend, reflecting its growth with strong free cash flow characteristics. Also reflecting its financial strength and prudent management, it took advantage of the Global Financial Crisis and acquired Barclays Global Investors in 2009, likely at a price that looks very attractive from a 2013 perspective.
The stock was a strong outperformer in the Great Recession period, setting an all-time high (ATH) months after the S&P 500 peaked and bouncing back strongly to set yet another ATH by the end of 2009. BLK then entered a prolonged period of consolidation. Insider buying in the fall of 2012 marked the bottom, and the stock has surged to new ATH's. However, it is only 17% above its December 2009 high price.
BLK has much to offer. Its market cap is under $50 B. Given the immensity of the fields of investments and financial services, there is almost endless room for the company to grow; it is nowhere near its maturity.
There are risks to BLK, including the obvious one that AUM drop when prices drop. BlackRock operates with high profit margins. These high margins have tended to be sustained within its business niche for decades, so undue skepticism is unwarranted, but the boilerplate language found in prospectuses about severe competitive pressures could come true and bring down profit margins substantially. These high margins and a premium P/E of 18.6X trailing earnings show that an Achilles heel for shareholders is the fact that BLK is trading at about 4X expected 2013 sales per share.
Overall, though, I believe that BLK is well-positioned to grow earnings and dividends at a pace above that of U.S. and global nominal GDP growth, and therefore has a fine risk-adjusted total return profile to long-term shareholders.
Lincoln National: The other financial stock I want to discuss is Lincoln National Corporation. 45% of its business comes from life insurance; 37% comes from Annuities plus Retirement Plan Services. LNC is a sort of bookend to BLK: It is much more of a turnaround story, but one that is already turning. LNC sells for about $33/share and a market cap of $8.85 B. Tangible book value at year end was $12.7 B and book value was $15.0 B.
Earnings estimates are holding steady around $4.49/share for 2013 and $4.86 for 2014. If those are realized, then Value Line projects a book value at year end 2014 of $61.50/share.
LNC is somewhat of a turnaround situation, but operations never really went bad. Thus LNC may simply be a neglected stock in a market chasing either uncertain growth (e.g. FaceBook (FB)] or income [e.g. many electric utilities and REITs at historically high P/Es) Earnings per share (EPS) for Lincoln were $3.68 in Y2K, $4.33 in 2005, and $5.15 (all time high) in 2007. The lowest they dropped to were $3.13 in 2010, so EPS did not fall very far, despite the Great Recession. There were some asset writedowns of significance in 2008, but it appears that some of them were reversed in later years.
I have followed LNC for years, but never owned it until this year. It was known for being a bull market-type stock, as much of its life insurance business was focused on high-net worth individuals whose life insurance returns were variable and tied to the stock market. (This is one reason earnings and the stock price both peaked in 2007.) In any case, it is 2013, and the company has been raising its dividend (which was slashed during the financial crisis) and shrinking its share count. Shares outstanding were 316 million in 2010 but only about 274 million last year (all historical data from Value Line).
A way to play the ongoing reflation theme in the United States is to seek out cheap assets that are being safeguarded by competent management before A) other traders do, or B) before you wake up one morning to find that a competitor has paid a nice premium to buy the entire company before you got around to taking a position in the shares. LNC is being viewed as a cyclical company that is not worth the tangible, accumulated value of all the money it has earned and not distributed to shareholders in its many years of existence. Looking at the 5-year stock chart and earlier trading patterns, I see no reason that LNC can't simply glide up to the $40-50 range and possibly challenge ATH levels in the $70s before the decade is over. In any case, I would hope for increasing dividends at the least.
Risks: Both BLK and LNC will be likely to drop in price if stocks enter a bear market. Everyone reading this is also already aware that numerous risks exist relating to business prospects and stock market action for each company, as they do for every company.
Summary: it appears to me that BLK remains an undervalued growth-and-income stock, and that LNC is simply undervalued. Patient buy-and-hold investors may be attracted to either or both equities for their long-term total return prospects.
Additional disclosure: I am not an investment adviser or certified analyst. Nothing herein constitutes investment advice.