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Summary

  • Second Quarter’s financial report with net revenue beat expectations by 33%.
  • Number of outstanding shares compared to other big 5 banks supports value of the stock price.
  • Financials and liquidity strong for Basel III requirements.
  • Goldman Sachs likely to take advantage of foreign investment opportunities.

Goldman Sachs Group Inc. (NYSE:GS) is one of the 6 big banks in America. The second quarter financial report was stellar and worthy of consideration to establish or increase your position in this company.

The second quarter highlights that bear discussion include the net revenue of $9.13 billion, with diluted EPS of $4.10. This beat analyst expectations of $3.07, which is impressive by beating expectations by 33%.

Net revenues in Investment Banking were $1.78 billion for the second quarter of 2014, 15% higher than the second quarter of 2013. Net revenue in financial advisory were higher compared with 2013, net revenue in underwriting were 20% higher. The net revenues in Fixed Income, Currency and Commodities Client Execution were $2.22 billion, or 10% lower than the second quarter of 2013. Net revenues in Investing and Lending were $2.07 billion for the second quarter of 2014, 46% higher than the second quarter of 2013 and 36% higher than the first quarter of 2014. Results for the second quarter of 2014 included net gains of $1.25 billion from investments in equities. Overall, a strong quarter compared to 2013 with an increase in income and cash flow.

On July 14, 2014, the Board of Directors declared a dividend of $0.55 per common share to be paid on September 29, 2014 to common shareholders of record on August 29, 2014. The dividend yield is 1.30% and could be/should be increased to reward investors. This is the highest dividend of the 6 big banks, but banks are behind most sectors on Wall Street in increasing dividends. One reason is the Federal Reserve Board continues to restrict and control the capital plans of the big banks.

Goldman Sachs reported its liquidity at $170 billion as of June 30, 2014. This amount is necessary for operations and meeting federal regulations. The Common Equity Tier 1 ratio was 11.4% as of June 30, 2014. This number strongly puts the company on solid footing compared to the Federal Reserve Board's 2014 Basel III requirements. The Feds will redefine the standards for 2015, but Goldman Sachs is well positioned to meet all the requirements.

The opportunity to grow will continue to emerge in Europe and the Pacific markets. Companies looking for partners with available cash reserves, access to American markets and willing to offer enticing opportunities will continue to grow into the near future. Goldman Sachs has a great opportunity to find strong investments with lucrative offerings.

During the quarter, Goldman Sachs repurchased 7.8 million shares (1.7%) of its common stock at an average cost per share of $160.89, for a total cost of $1.25 billion. The remaining share authorization under the firm's existing repurchase program is 39.1 million shares. If the company plans to resell these shares on the market, it is likely they will recover more than the average cost they paid to repurchase. With less outstanding shares, the current stockholders will enjoy the higher returns each quarter.

Key Analysis: I highlight this because the other 5 big banks have huge numbers of outstanding shares in the billions.

  • Bank of America (NYSE:BAC) has 10.5 billion outstanding shares.
  • Wells Fargo & Co. (NYSE:WFC) has 5.2 billion outstanding shares.
  • JPMorgan Chase & Co. (NYSE:JPM) has 3.7 billion outstanding shares.
  • Citigroup Inc. (NYSE:C) has 3.0 billion outstanding shares.
  • Morgan Stanley (NYSE:MS) has 1.9 billion outstanding shares.

This is the largest factor that has pushed the stock price so high for Goldman Sachs. If GS conducted a stock split of 23.8 to 1, to equate near the 10.5 billion shares BAC has, Goldman Sachs' stock price would drop to about $7.31. The dividend of $0.55 would be shared by 10.5 billion shareholders and would equate to about $0.023 per share. Current stockholders of Goldman Sachs are quite happy where they are today.

Goldman Sachs will also be able to retire debt that will enhance its liquidity and Basel III requirements with excess capital it earns in the third and fourth quarters. Stock buybacks are good when the market price is right, but reducing debt is good almost all the time.

The book value increased nearly 2% to $158.21 as of June 30, 2014. The stock trades at a premium, and with 440 million outstanding shares that drives the stock price well above the hundred dollar mark to $174.03 as of the open on August 21, 2014. Wall Street investors appreciate that less is better when it comes to outstanding shares.

Going to Court: Goldman Sachs will proceed with a court hearing from the lawsuit filed by the Libyan Investment Authority (LIA), in January 2014 at London's High Court. The suit is over a fund that was a sovereign wealth fund valued at nearly $1.3 billion in 2008 and lost 98% of its value. Goldman applied for the summary judgment in April 2014, but has now dropped the request. The hearing is scheduled in October 2014. The cost could include the $1.3 billion fund assets, plus damages, plus fees, which could dwarf the initial assets' cost. International laws will apply to the hearing so the outcome is far from certain.

Final Analysis: Goldman Sachs Group Inc. is a financially strong company, well positioned in the market and very competitive in all aspects of banking. The last several quarterly reports have been profitable to the company and investors. The company has passed all the requirements from the Federal Reserve during the Basel III requirements and is strong with liquidity.

I am a fan of the company repurchasing stock off the market when they can buy at a good time in the market. I anticipate the company will continue to buy when the price is right. With 440 million outstanding shares, they are much better positioned than all the other big banks. Our analysis shows the company could reduce more debt with the excess cash and increase the dividend each quarter, as we would like to see a dividend near 3% return.

Goldman Sachs has room to grow, especially in the world markets as the opportunity increases. Expanding into Europe and the Pacific will allow for a more diverse portfolio and higher growth rates. Partnerships will be especially attractive, as the excessive cash will provide the opportunity to buy into lucrative positions.

Goldman Sachs is an excellent choice for a portfolio looking to grow. It is not likely to grow its dividend very much over the next year or two, but investors can anticipate a stock price appreciation through 2014 and into 2015. We rate Goldman Sachs Group Inc. as a buy and hold. We can anticipate the stock price growing past the 52-week high of $181.13 prior to the year's end. Breaking the $200 mark will have to wait until next Spring with the next round of Basel III evaluations. Goldman Sachs will pass all the standards, but how well will become the factor to drive the stock price to $200.